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The website explains how distributable cash flow (DCF) is defined and why it is important to analyze it and derive a sustainable measure of DCF. Results reported by master limited partnerships (MLPs) are analyzed. comparisons of reported DCF to sustainable DCF are generated, and various coverage ratios and reports analyzing performance are generated. Simplified sources and uses of funds statements are presented to focus readers' attention on key cash flow items. The website also features general articles about MLPs and about other topics of interest to yield-focused investors.



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SPH: A Closer Look at 2011 Distributable Cash Flow Generated by Suburban Propane Partners

Author: Ron Hiram

Date published: Apr 21, 2012

Suburban Propane Partners (SPH) markets and distributes fuel oil, kerosene, diesel fuel and gasoline to approximately 48,000 residential and commercial customers in the northeast region of the United States. It is one of the largest retail marketers of propane in the United States, measured by retail gallons sold. SPH typically sells ~ 2/3 of its retail propane volume and ~ 3/4 of its retail fuel oil volume during the peak heating season of October through March.

Operating income declined 27% in fiscal 2010 (ended 9/30/10) vs. a particularly strong fiscal 2009, and declined ~6% in fiscal 2011 (ended 9/30/11). Yet SPH has maintained its distribution per unit at $3.41 ($0.8525 per quarter) for the last 7 consecutive quarters. The unit price has dropped 22% in the last 12 months (market cap is currently ~$1.56 billion) and the distribution yield is currently 7.78%. The question is whether the distribution is sustainable.

Distributable cash flow (“DCF”) is a quantitative standard viewed by investors, analysts and the general partners of many master limited partnerships (“MLPs”) as an indicator of the MLP’s ability to generate cash flow at a level that can sustain or support an increase in quarterly distribution rates. Since DCF is not a Generally Accepted Accounting Principles (“GAAP”) measure, its definition is not standardized. In fact, as shown in a prior article, each MLP may define DCF differently. SPH does not define DCF at all and the only non-GAAP measure it reports is adjusted EBITDA. A review of its cash flows and the sustainability of its distributions can still be performed, albeit without a comparison to reported DCF.

For ease of comparison to SPH’s report on Form 10-K and to other MLPs, the table below provides numbers for both fiscal and calendar year-ends:

12 months ended:12/31/20119/30/2011 12/31/20109/30/2010
Net cash provided by operating activities112.3132.8165.7155.8
Less: Maintenance capital expenditures(9.6)(10.2)(11.0)(9.7)
Less: Working capital (generated)--(4.7)-
Less: net income attributable to GP----
Less: Net income attributable to noncontrolling interests----
Sustainable DCF102.7122.6149.9146.1
Partnership distributions120.8120.6119.0118.3


Data for the latest 12 months ended 12/31/11 indicates that sustainable DCF no longer covers distributions. The gap has not been filled by issuing debt or equity, but rather by reducing cash reserves. This can be seen from a simplified cash flow statement in the table below.

Simplified Sources and Uses of Funds:

12 months ended:12/31/20119/30/2011 12/31/20109/30/2010
Net cash from operations, less maintenance capex, less distributions-18.1---
Capital expenditures ex maintenance, net of proceeds from sale of PP&E-7.5-6.1-4.1-5.9
Acquisitions, investments (net of sale proceeds)-0.7-3.2-17.8-14.5
Debt incurred (repaid)---13.7-13.7
Net cash from operations, less maintenance capex, less distributions-235.627.8
Debt incurred (repaid)----
Partnership units issued----
Net change in cash-26.3-7.40.1-6.3


Table 2: Figures in $ Millions; fiscal year ends Sep 30.

Compared to the prior year period, results for the first half the heating season in fiscal 2012 (i.e., quarter ended 12/31/11) show a ~8.5% drop in revenues, and a 40% drop in operating income:

3 months ended:12/31/201112/31/2010
Fuel oil and refined fuels3138
Natural gas and electricity1819
All other1012
Total Revenues300328
Cost of products sold184187
General and administrative1214
Restructuring charges and severance costs--
Pension settlement charge--
Depreciation and amortization88
Total Costs and expenses270278
Operating income3050


Table 3: Figures in $ Millions.

Results for the second half the heating season in fiscal 2012 (i.e., quarter ended 3/31/12) will be published shortly. Based on the warmer than usual weather, they may compare unfavorably with the prior year period and that would indicate fiscal 2012 will also not look good compared to fiscal 2011.

The balance sheet indicates low leverage (long term debt to EBITDA of ~2.2x), so debt can be used to supplement additional reductions in cash reserves to maintain the current distribution level in the hope that colder weather will return in the next heating season and drive an improvement in results. But does this constitute a sound basis for an investment in SPH?

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