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 nine months endedJune 26, 2021 . 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 26, 2020 .
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. 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 26, 2020 and in this Quarterly Report. COVID-19 Pandemic The COVID-19 pandemic has resulted in increased unemployment, commodity and stock market volatility, significant government stimulus and uncertainty about economic conditions that will prevail in the months ahead. In response to temporary government restrictions on businesses during much of calendar year 2020, certain of our commercial and industrial customers were forced to temporarily curtail or suspend operations, or otherwise were impacted by lower economic activity as a result of the COVID-19 pandemic. As a result, we experienced a period of lower revenues in certain customer sectors, particularly during the period fromMarch 2020 throughDecember 2020 . Notwithstanding those challenges, we also experienced an increase in usage in our residential and certain other customer segments that benefited from stay-at-home initiatives and the demand for temporary, portable energy solutions. We took decisive action in the early stages of the pandemic to adapt our business model and modify our operating protocols in order to help protect the health and safety of our employees, while ensuring seamless delivery of our essential services to the customers and communities we serve. As COVID-19 related business restrictions continue to ease, customer demand in those sectors most impacted originally by the pandemic have started to normalize, although there continues to be a risk of permanent demand destruction if economic conditions deteriorate, or if businesses are unable to recover. While we expect that many of these effects will not be permanent, it is impossible to predict their duration. We have developed, implemented and continue to refine alternative operational plans, inclusive of manpower levels, to address different customer demand scenarios, and we continue to adapt our operational model to shifting demand patterns and the potential impact of the COVID-19 pandemic on future cash flows and access to adequate liquidity as we navigate through the 2021 fiscal year and beyond.
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. During the third quarter of fiscal 2021, the wholesale cost of propane initially fell before rising to close well above the cost at the outset of the quarter which was reflective of the contraction inU.S. propane inventory levels resulting from higher domestic 25
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consumption, coupled with increased exports. According to theEnergy Information Administration ,U.S. propane inventory levels at the end ofJune 2021 were 57.5 million barrels, which was 23% lower thanJune 2020 levels, and 10% lower than the 5-year average for June. Average posted propane prices (basisMont Belvieu, Texas ) were 111.5% higher than the prior year third quarter, albeit 3.7% lower than the prior sequential quarter. Consistent with our established practice, we adjusted customer pricing accordingly as market conditions allowed.
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. 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 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 26
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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 our
Results of Operations and Financial Condition
Consistent with the seasonal nature of our businesses, we typically experience a net loss in the third quarter of our fiscal year. Net loss for the third quarter of fiscal 2021 was$26.0 million , or$0.41 per Common Unit, compared to a net loss of$15.6 million , or$0.25 per Common Unit, in the prior year third quarter. Adjusted earnings before interest, taxes, depreciation and amortization ("Adjusted EBITDA," as defined and reconciled below) for the third quarter of fiscal 2021 amounted to$23.3 million , compared to$32.2 million in the prior year third quarter. Retail propane gallons sold in the third quarter of fiscal 2021 of 76.7 million gallons increased 1.7% compared to the prior year third quarter, primarily due to an increase in commercial and industrial demand resulting from the easing of COVID-related business restrictions and an improving economy, which more than offset normalizing residential demand in this counter-seasonal quarter. Residential volumes in the prior year third quarter benefitted from cooler average temperatures in April and May of 2020, combined with stay-at-home measures instituted in the early stages of COVID-19. The mix of volumes between residential and non-residential customers returned to a more traditional, pre-pandemic level, during the third quarter of fiscal 2021. Average temperatures (as measured by heating degree days) across all of our service territories for the fiscal 2021 third quarter were 9% warmer than both normal and the prior year third quarter. Average posted propane prices (basisMont Belvieu, Texas ) for the third of fiscal 2021 were 111.5% higher than the prior year third quarter. Total gross margins for the third quarter of fiscal 2021 of$155.0 million increased$7.8 million , or 5.3%, compared to the prior year third quarter. Gross margins for the fiscal 2021 third quarter included an$11.1 million unrealized non-cash gain attributable to the mark-to-market adjustment for derivative instruments used in risk management activities, compared to a$0.9 million unrealized non-cash gain in the prior year third quarter. These unrealized gains were excluded from Adjusted EBITDA for both periods in the table below. The shift in volume mix between residential and non-residential customers, back to a more traditional level for the third quarter, also resulted in lower blended unit margins compared to the prior year third quarter. Combined operating and general and administrative expenses of$119.8 million increased$6.6 million , or 5.8%, compared to the prior year third quarter, primarily due to higher volume-related variable operating costs, as well as an increase in self-insured medical costs and higher vehicle costs. During the third quarter of fiscal 2021, we utilized cash flows from operating activities to repay$29.8 million of debt. As a result of the debt repayment during the third quarter, the Consolidated Leverage Ratio for the trailing twelve-month period endingJune 26, 2021 measured 3.96x. In addition, inMay 2021 we opportunistically refinanced our previously outstanding$525.0 million 5.50% Senior Notes due 2024 and$250.0 million 5.75% Senior Notes due 2025 with a combination of borrowings under the Revolving Credit Facility and the issuance of new$650.0 million 5.00% Senior Notes due 2031. This refinancing will result in annual net interest expense savings of approximately$7.0 million and extend average debt maturities by more than 3.5 years. As previously announced onJuly 22, 2021 , the Partnership'sBoard of Supervisors declared a quarterly distribution of$0.325 per Common Unit effective for the distribution payable in respect of the third quarter of fiscal 2021. This distribution is payable onAugust 10, 2021 to Common Unitholders of record as ofAugust 3, 2021 . This quarterly distribution equated to an increase of 8.3% from the previous distribution rate of$0.30 that was in effect for each of the first two quarters of fiscal 2021. Our anticipated cash requirements for the remainder of fiscal 2021 include: (i) maintenance and growth capital expenditures of approximately$13.2 million ; (ii) interest and income tax payments of approximately$11.7 million ; and (iii) cash distributions of approximately$20.3 million to our Common Unitholders based on the quarterly distribution rate of$0.325 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. The unprecedented health crisis from COVID-19 and the variants thereof continues to represent a complex uncertainty, which has had a profound 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 have been impacted by the economic slowdown included: • The temporary suspension of business operations by certain of our commercial and industrial customers has resulted in lower demand, principally during calendar year 2020, from these customer markets;
• In certain states, restrictions were placed on our business that would
otherwise allow us to decline or refuse to service certain customers who
have not or are unwilling to pay for product delivered or services
rendered;
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Table of Contents • There may be potential disruptions in the propane supply chain; 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 and update guidance on workplace safety
protocols.
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 and reduce our cash requirements, leave us well positioned to manage our business through the crisis as it continues to unfold. Nonetheless, as we progress through the 2021 fiscal year, there remains significant uncertainty regarding the longer-term economic effects and the scope and duration of governmental policies that have been, or may in the future be, instituted to mitigate the spread of COVID-19, and the variants thereof, 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 will continue to adapt to the changing circumstances and make decisions to help ensure the long-term sustainability of our businesses, and to be able to be opportunistic for strategic growth initiatives. We made additional investments in our minority-owned subsidiary,Oberon Fuels ("Oberon"), as they achieved several milestones toward our collective efforts to commercialize clean-burning, renewable dimethyl ether ("rDME"). Specifically, inJune 2021 , Oberon began production of the first-ever rDME inthe United States , and is the only current commercial producer of this molecule in the world. Additionally, Oberon, through a public-private partnership withLos Alamos National Laboratory , has secured funding from theU.S. Department of Energy to develop and scale-up steam reforming technology to produce renewable hydrogen from rDME.
Three Months Ended
Revenues
(Dollars and gallons in thousands) Three Months Ended Percent
June 26, June 27, Increase Increase
2021 2020 (Decrease) (Decrease)
Revenues
Propane $ 208,689 $ 179,049 $ 29,640 16.6 %
Fuel oil and refined fuels 11,314 11,702 (388 ) (3.3 )%
Natural gas and electricity 5,835 6,099 (264 ) (4.3 )%
All other 12,247 10,056 2,191 21.8 %
Total revenues $ 238,085 $ 206,906 $ 31,179 15.1 %
Retail gallons sold
Propane 76,702 75,383 1,319 1.7 %
Fuel oil and refined fuels 3,854 4,797 (943 ) (19.7 )%
As discussed above, average temperatures across all of our service territories
during the third quarter of fiscal 2021 were 9% warmer than both the prior year
third quarter and normal (as measured by the thirty-year average of heating days
utilized by NOAA ). The decrease in heating degree days compared to the prior
year was attributable to a warmer weather pattern throughout most of the third
quarter, particularly during the months of April and May where average
temperatures were 8% warmer than normal and 13% warmer than April and May of
last year.
Revenues from the distribution of propane and related activities of $208.7
million increased $29.6 million , or 16.6%, compared to the prior year, primarily
due to higher average retail selling prices, coupled with an increase in volumes
sold. Average propane selling prices increased 14.0% compared to the prior year,
reflecting higher average wholesale costs, resulting in a $25.6 million increase
in revenues. Retail propane gallons sold increased 1.3 million gallons, or 1.7%,
compared to the prior year, primarily due to an increase in commercial and
industrial demand resulting from the easing of COVID-19 related restrictions on
businesses and improving economic conditions that more than offset lower
residential demand stemming from warmer spring temperatures, resulting in a $3.1
million increase in revenues. Included within the propane segment are revenues
from other propane activities, which increased $0.9 million primarily due to a
higher 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 $11.3 million
were $0.4 million , or 3.3%, lower than the prior year, primarily due to a
decrease in volumes sold, offset to an extent by higher average retail selling
prices. Fuel oil and refined fuels gallons sold decreased 0.9 million gallons,
or 19.7%, primarily due to warmer weather across our service territories in the
northeast, resulting in a $2.3 million decrease in revenues. Average fuel oil
and refined fuels selling prices increased 20.4% compared to the prior year,
reflecting higher average wholesale costs, resulting in a $1.9 million increase
in revenues.
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Revenues in our natural gas and electricity segment of$5.8 million were$0.3 million , or 4.3%, lower than the prior year, primarily due to a reduction to the customer base resulting from actions taken by theNew York State Public Utility Commission to reregulate this segment of our business, coupled with warmer temperatures. Cost of Products Sold (Dollars in thousands) Three Months Ended June 26, June 27, Percent 2021 2020 Increase Increase Cost of products sold Propane$ 68,219 $ 47,981 $ 20,238 42.2 % Fuel oil and refined fuels 7,560 5,903 1,657 28.1 % Natural gas and electricity 3,482 3,103 379 12.2 % All other 3,795 2,702 1,093 40.5 % Total cost of products sold$ 83,056 $ 59,689 $ 23,367 39.1 % As a percent of total revenues 34.9 % 28.8 % 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 111.5% and 105.5% higher than the prior year third quarter, respectively. The net change in the fair value of derivative instruments resulted in an$11.1 million unrealized non-cash gain in the third quarter of fiscal 2021 compared to a$0.9 million unrealized non-cash gain in the prior year quarter, resulting in a decrease of$10.2 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. Cost of products sold associated with the distribution of propane and related activities of$68.2 million increased$20.2 million , or 42.2%, compared to the prior year third quarter, primarily due to higher average wholesale costs and, to a lesser extent, higher volumes sold. Higher average wholesale costs contributed to an increase in cost of products sold of$29.0 million , and higher volumes sold contributed to an increase of$0.8 million . Included within the propane segment are costs from other propane activities which increased$0.6 million compared to the prior year, as well as the$10.2 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$7.6 million increased$1.7 million , or 28.1%, compared to the prior year third quarter. Higher average wholesale costs led to an increase in costs of products sold of$2.8 million , which was offset to an extent by the impact of lower volumes sold of$1.1 million . Cost of products sold in our natural gas and electricity segment of$3.5 million increased$0.4 million , or 12.2%, compared to the prior year primarily due to higher natural gas and electricity wholesale costs. 29
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Operating Expenses
(Dollars in thousands) Three Months Ended
June 26, June 27, Percent
2021 2020 Increase Increase
Operating expenses $ 102,016 $ 96,086 $ 5,930 6.2 %
As a percent of total revenues 42.8 % 46.4 %
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
General and Administrative Expenses
(Dollars in thousands) Three Months Ended
June 26, June 27, Percent
2021 2020 Increase Increase
General and administrative expenses
3.8 %
As a percent of total revenues 7.5 % 8.3 %
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 $17.8 million for the third quarter of
fiscal 2021 increased $0.7 million , or 3.8%, compared to the prior year third
quarter, primarily due to an increase in variable compensation costs
attributable to higher fiscal year to date earnings, as well as higher
professional fees.
Depreciation and Amortization
(Dollars in thousands) Three Months Ended
June 26, June 27, Percent
2021 2020 Decrease Decrease
Depreciation and amortization
(6.5 )% As a percent of total revenues 11.4 % 14.1 % Depreciation and amortization expense of$27.3 million for the third quarter of fiscal 2021 decreased$1.9 million , or 6.5%, compared to the prior year third quarter, primarily due to accelerated depreciation expense recorded in the prior year for assets taken out of service, coupled with lower levels of capital expenditures. Interest Expense, net (Dollars in thousands) Three Months Ended June 26, June 27, Percent 2021 2020 Decrease Decrease Interest expense, net$ 16,737 $ 18,474 $ (1,737 ) (9.4 )% As a percent of total revenues 7.0 % 8.9 % Net interest expense of$16.7 million in the third quarter of fiscal 2021 decreased$1.7 million , or 9.4%, compared to the prior year quarter, primarily due to a lower level of debt outstanding, as well as a decrease in short-term benchmark interest rates on 30
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outstanding borrowings under our Revolving Credit Facility and the impact of the refinancing of two tranches of Senior Notes at lower rates. See Liquidity and Capital Resources below for additional discussion.
Loss on Debt Extinguishment
OnMay 24, 2021 , we repurchased, satisfied and discharged all of our previously outstanding 2024 Senior Notes and 2025 Senior Notes with net proceeds from the issuance of the 2031 Senior Notes and borrowings under the Revolving Credit Facility, as described and defined below, pursuant to a tender offer and redemption. In connection with this tender offer and redemption during the third quarter of fiscal 2021, we recognized a loss on the extinguishment of debt of$16.0 million , consisting of$11.5 million for the redemption premium and related fees, as well as the write-off of$4.5 million in 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
June 26, June 27,
2021 2020
Net loss $ (26,021 ) $ (15,578 )
Add:
Provision for income taxes 173 106
Interest expense, net 16,737 18,474
Depreciation and amortization 27,254 29,153
EBITDA 18,143
32,155
Unrealized non-cash gains on changes in fair value of derivatives
(11,139 ) (861 )
Equity in earnings of unconsolidated affiliate 116 -
Pension settlement charge 142 900
Loss on debt extinguishment 16,029 -
Adjusted EBITDA $ 23,291 $ 32,194 Nine Months Ended
Revenues
(Dollars and gallons in thousands) Nine Months Ended Percent
June 26, June 27, Increase Increase
2021 2020 (Decrease) (Decrease)
Revenues
Propane $ 958,641 $ 812,160 $ 146,481 18.0 %
Fuel oil and refined fuels 59,075 69,095 (10,020 ) (14.5 )%
Natural gas and electricity 23,461 25,018 (1,557 ) (6.2 )%
All other 39,337 35,566 3,771 10.6 %
Total revenues $ 1,080,514 $ 941,839 $ 138,675 14.7 %
Retail gallons sold
Propane 357,443 341,632 15,811 4.6 %
Fuel oil and refined fuels 21,301 23,354 (2,053 ) (8.8 )%
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Table of Contents Average temperatures (as measured in heating degree days) across all of our service territories for the first nine months of fiscal 2021 were 9% warmer than normal and 1% cooler than the prior year period. The weather during the first nine months of fiscal 2021 was characterized by widespread unseasonably warm temperatures during the first and third fiscal quarters, with sustained and widespread cooler temperatures throughout much of the second quarter. The cooler second quarter temperatures compared to the prior year were experienced throughout most of our operating territories, with cooler temperatures occurring duringDecember 2020 throughFebruary 2021 , which are the most critical months for heat-related demand. The cooler weather pattern during the critical months of the heating season, combined with improving economic conditions from the easing of restrictions on certain commercial and industrial businesses contributed to an increase in customer demand and volumes sold. Revenues from the distribution of propane and related activities of$958.6 million increased$146.5 million , or 18.0%, compared to the prior year period, primarily due to higher average retail selling prices and an increase in volumes sold. Average propane selling prices increased 9.5% compared to the prior year period, reflecting a rise in average wholesale costs, resulting in an$81.0 million increase in revenues. Retail propane gallons sold increased 15.8 million gallons, or 4.6%, compared to the prior year, resulting in a$37.6 million increase in revenues. Included within the propane segment are revenues from other propane activities, which increased$27.9 million primarily due to a higher 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$59.1 million decreased$10.0 million , or 14.5%, compared to the prior year period, primarily due to lower volumes sold and lower average selling prices. Fuel oil and refined fuels volumes sold decreased 2.1 million gallons, or 8.8%, resulting in a$6.1 million decrease in revenues. Average selling prices for fuel oil and refined fuels decreased 6.2%, resulting in a$3.9 million decrease in revenues. Revenues in our natural gas and electricity segment of$23.5 million were$1.6 million , or 6.2%, lower than the prior year, resulting from actions taken by theNew York State Public Utility Commission that limited energy service companies, including our natural gas and electricity business, from servicing certain customers in the state ofNew York . Cost of Products Sold (Dollars in thousands) Nine Months Ended Percent June 26, June 27, Increase Increase 2021 2020 (Decrease) (Decrease) Cost of products sold Propane$ 358,292 $ 261,798 $ 96,494 36.9 % Fuel oil and refined fuels 35,203 42,780 (7,577 ) (17.7 )% Natural gas and electricity 12,858 13,532 (674 ) (5.0 )% All other 11,649 10,297 1,352 13.1 % Total cost of products sold$ 418,002 $ 328,407 $ 89,595 27.3 % As a percent of total revenues 38.7 % 34.9 % In the commodities markets, average posted propane prices (basisMont Belvieu, Texas ) and fuel oil prices were 83.1% and 12.4% higher than the prior year period, respectively. The net change in the fair value of derivative instruments resulted in a$17.6 million unrealized non-cash gain and a$1.1 million unrealized non-cash loss in the first nine months of fiscal 2021 and 2020, respectively, resulting in a decrease of$18.7 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$358.3 million increased$96.5 million , or 36.9%, compared to the prior year period. Increases in average wholesale costs and an increase in volumes sold contributed to increases in cost of products sold of$81.0 million and$11.7 million , respectively. Included within the propane segment are costs from other propane activities which increased$22.5 million compared to the prior year, as well as the$18.7 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
Cost of products sold in our natural gas and electricity segment of
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Operating Expenses
(Dollars in thousands) Nine Months Ended
June 26, June 27, Percent
2021 2020 Decrease Decrease
Operating expenses $ 309,183 $ 313,550 $ (4,367 ) (1.4 )%
As a percent of total revenues 28.6 % 33.3 %
Operating expenses of $309.2 million for the first nine months of fiscal 2021
decreased $4.4 million , or 1.4%, compared to the corresponding prior year
period, as the impact of higher volume-related variable operating costs in
support of the increase in volumes sold was substantially offset by a reduction
in product, auto and workers compensation claims, lower provisions for doubtful
accounts, and operating efficiencies. The corresponding period of fiscal 2020
included a charge of approximately $5.0 million for the settlement of certain
product liability and other legal matters.
General and Administrative Expenses
(Dollars in thousands) Nine Months Ended
June 26, June 27, Percent
2021 2020 Increase Increase
General and administrative expenses
5.4 % 5.3 %
General and administrative expenses of $57.9 million for the first nine months
of fiscal 2021 increased $8.1 million , or 16.2%, compared to the prior
year period, primarily due to higher variable compensation expenses given the
year-over-year increase in earnings.
Depreciation and Amortization
(Dollars in thousands) Nine Months Ended
June 26, June 27, Percent
2021 2020 Decrease Decrease
Depreciation and amortization
(5.8 )% As a percent of total revenues 7.6 % 9.3 %
Depreciation and amortization expense of
Interest Expense, net
(Dollars in thousands) Nine Months Ended
June 26, June 27, Percent
2021 2020 Decrease Decrease
Interest expense, net $ 52,964 $ 56,722 $ (3,758 ) (6.6 )%
As a percent of total revenues 4.9 % 6.0 %
Net interest expense of $53.0 million in the first nine months of fiscal 2021
decreased $3.8 million , or 6.6%, compared to the prior year period, primarily
due to a lower level of debt outstanding, as well as a decrease in short-term
benchmark interest rates on outstanding borrowings under the Revolving Credit
Facility and the impact of the refinancing of two tranches of Senior Notes at
lower rates. See Liquidity and Capital Resources below for additional
discussion.
Loss on Debt Extinguishment
OnMay 24, 2021 , we repurchased, satisfied and discharged all of our previously outstanding 2024 Senior Notes and 2025 Senior Notes with net proceeds from the issuance of the 2031 Senior Notes and borrowings under the Revolving Credit Facility, as described and defined below, pursuant to a tender offer and redemption. In connection with this tender offer and redemption during the third quarter of fiscal 2021, we recognized a loss on the extinguishment of debt of$16.0 million , consisting of$11.5 million for the redemption premium and related fees, as well as the write-off of$4.5 million in unamortized debt origination costs. 33
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EBITDA and Adjusted EBITDA
The following table sets forth our calculations of EBITDA and Adjusted EBITDA:
(Dollars in thousands) Nine Months Ended
June 26, June 27,
2021 2020
Net income $ 139,172 $ 101,946
Add:
Provision for (benefit from) income taxes 936 (253 )
Interest expense, net 52,964 56,722
Depreciation and amortization 82,617 87,715
EBITDA 275,689 246,130
Unrealized non-cash (gains) losses on changes in
fair value of derivatives (17,632 ) 1,077
Equity in earnings of unconsolidated affiliate 552 - Pension settlement charge 712 900 Loss on debt extinguishment 16,029 109 Adjusted EBITDA$ 275,350 $ 248,216
Liquidity and Capital Resources
Analysis of Cash Flows
Operating Activities. Net cash provided by operating activities for the first nine months of fiscal 2021 increased$11.8 million compared to the corresponding prior year period. This increase was primarily due to higher earnings, offset to an extent by a larger increase in working capital compared to the prior year which stemmed from the rise in average wholesale costs of propane (discussed above). Investing Activities. Net cash used in investing activities of$27.8 million for the first nine months of fiscal 2021 consisted of capital expenditures of$21.8 million (including approximately$11.3 million to support the growth of operations and$10.5 million for maintenance expenditures),$8.3 million used to fund the acquisition of a retail propane business and other investment activities (see Item 1, Note 4 of this Quarterly Report), partially offset by approximately$2.3 million in proceeds from the sale of property, plant and equipment. Net cash used in investing activities of$45.6 million for the first nine months of fiscal 2020 consisted of capital expenditures of$26.1 million (including approximately$15.5 million to support the growth of operations and$10.6 million for maintenance expenditures), and$22.0 million used to fund the acquisitions of two retail propane businesses, partially offset by approximately$2.5 million in proceeds from the sale of property, plant and equipment. Financing Activities. Net cash used in financing activities for the first nine months of fiscal 2021 reflected$56.2 million paid for the quarterly distributions to Common Unitholders at a rate of$0.30 per Common Unit paid in respect of the fourth quarter of fiscal 2020 and the first and second quarters of fiscal 2021, and other financing activities of$3.6 million . Also reflected in financing activities for the first nine months of fiscal 2021 was proceeds of$650.0 million from the issuance of the 2031 Senior Notes which were used, along with borrowings of$125.0 million under the Revolving Credit Facility, to repurchase, satisfy and discharge all of the previously outstanding 2024 Senior Notes and 2025 Senior Notes, with an aggregate par value of$775.0 million , as well as to pay tender premiums and other related fees of$11.3 million and debt issuance costs of$10.8 million , pursuant to a tender offer and redemption. For the nine months endedJune 26, 2021 , we utilized excess cash flows to repay$68.2 million of total debt. Net cash used in financing activities for the first nine months of fiscal 2020 reflected$111.6 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 the first and second quarters of fiscal 2020,$2.7 million in issuance costs for the refinancing of our previous revolving credit facility,$3.8 million in net repayments of borrowings under the Revolving Credit Facility and other financing activities of$3.6 million . 34
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Summary of Long-Term Debt Obligations and Revolving Credit Facility
As ofJune 26, 2021 , our long-term debt consisted of$350.0 million in aggregate principal amount of 5.875% senior notes dueMarch 1, 2027 ,$650.0 million in aggregate principal amount of 5.0% senior notes dueJune 1, 2031 and$151.4 million outstanding under our Revolving Credit Facility. See Item 1, Note 10 of this Quarterly Report. Based upon our Consolidated EBITDA, as defined in the Credit Agreement, for the trailing twelve-month period endedJune 26, 2021 , and outstanding borrowings and letters of credits issued under the Revolving Credit Facility as ofJune 26, 2021 , our borrowing capacity under the Revolving Credit Facility was$291.8 million . The aggregate amounts of long-term debt maturities subsequent toJune 26, 2021 are as follows: fiscal 2021:$-0 -; fiscal 2022:$-0 -; fiscal 2023:$-0 -; fiscal 2024:$-0 -; fiscal 2025:$151.4 million ; and thereafter:$1,000.0 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. OnJuly 22, 2021 , we announced a quarterly distribution of$0.325 per Common Unit, or$1.30 on an annualized basis, in respect of the third quarter of fiscal 2021, payable onAugust 10, 2021 to holders of record onAugust 3, 2021 . This quarterly distribution equated to an increase of 8.3% from the previous distribution rate of$0.30 per Common Unit that was in effect for each of the first two quarters of fiscal 2021.
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 . AtJune 26, 2021 , we had a liability for the defined benefit pension plan and accrued retiree health and life benefits of$30.6 million and$8.4 million , respectively. We are self-insured for general and product, workers' compensation and automobile liabilities up to predetermined thresholds above which third party insurance applies. AtJune 26, 2021 , we had accrued insurance liabilities of$67.8 million , and a receivable of$16.3 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.
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Off-Balance Sheet Arrangements
Guarantees
See Item 1, Note 14 of this Quarterly Report.
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