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SPH benefited from lower oil prices; it did not pass on to its customers all the benefits of lower propane costs thus increasing gross margin to 57% in 3QFY15 . Distributions coverage at 1.09x in the TTM ended 6/30/15; sustainable DCF shows a marked improvement over the prior TTM period. SPH has demonstrated less volatility and has performed better than the Alerian MLP Index over the past 12 months. SPH may not provide substantial distribution growth and may underperform the index if we see sustained increases in MLP price levels. But the ~10% yield appears secure, the valuation multiple is lower, and it is less leveraged. This article focuses on some of the key facts and trends revealed by results recently reported by Suburban Propane Partners LP (NYSE: SPH ). The quarters are noted with an FY designation because SPH’s fiscal year ends in September. Its third quarter of fiscal 2015 ended on 6/30/15 and is designated as 3QFY15. The article evaluates the sustainability of the partnership’s Distributable Cash Flow (“DCF”) and assesses whether SPH is financing its distributions via issuance of new units or debt. SPH is organized into 3 principal business segments. The propane segment, which generates the bulk of SPH’s revenues and cash flows, is primarily engaged in the retail distribution of propane to residential, commercial, industrial and agricultural customers and, to a lesser extent, wholesale distribution to large industrial end users. The fuel oil and refined fuels segment is primarily engaged in the retail distribution of fuel oil, diesel, kerosene and gasoline to residential and commercial customers for use primarily as a source of heat in homes and buildings. The natural gas and electricity segment is engaged in the marketing of natural gas and electricity to residential and commercial customers in the deregulated energy markets of New York and Pennsylvania. SPH is also engaged in other activities, primarily the sale, installation and servicing of a wide variety of home comfort equipment, particularly in the areas of heating and ventilation. SPH’s business is highly seasonal. It typically sells ~ 2/3 of its retail propane volume and ~ 3/4 of its retail fuel oil volume during the peak heating season of October through March. Consequently, the bulk of sales and operating profits are concentrated in the quarters ending December and March (the first and second quarters of the fiscal year). In the quarters ended June and September SPH typically reports losses. Cash flows and DCF coverage ratios are typically highest during the quarters ending March and June; this is when customers pay for product purchased during the winter heating season. SPH’s profitability is largely dependent on volumes generated by its retail propane operations and on the gross margin it achieves on propane sales – the difference between retail sales price and product cost. Table 1 shows volumes and gross margins for the 8 most recent quarters: (click to enlarge) Table 1: Figures in $ Millions, except gallons and percentages. Source: company 10-Q, 10-K, 8-K filings and author estimates. Volumes and earnings for 3QFY15 were adversely affected by unseasonably warm weather during much of 3QFY15 (16% warmer than normal and 6% warmer than 3QFY14 in areas served by SPH). In addition, the timing of the much colder than normal temperatures in March 2015 led to additional deliveries during 2QFY15, obviating the need for further deliveries in 3QFY15 to many customers. Propane prices in 3QFY15 fluctuated between $0.32-$0.57 per gallon and, on average, declined by 55.9% vs. 2QFY15, in line with the dramatic declines in crude oil and natural gas prices as prices. Lower propane prices benefit SPH’s customers and affect SPH by decreasing both its revenues and cost of goods sold. The impact on gross margin may vary; in 3QFY15 gross margin increased to 57% of revenues compared to 46% in 3QFY14 because SPH did not pass on to its customers all the benefits of lower propane costs. However, gross margin declined in absolute dollar terms ($126 million vs. $136 million) due to lower volumes. DCF and adjusted earnings before interest, depreciation & amortization and income tax expenses (“Adjusted EBITDA”) are the primary measures typically used master limited partnerships (“MLPs”) to evaluate their operating results. Making comparisons between MLPs is difficult because of lack of standard definitions these terms (a recent article discusses some examples). It is even more so in the case of SPH because it does not measure its results in terms of DCF and does not provide DCF data. However, SPH does provide Adjusted EBITDA figures: (click to enlarge) Table 2: Figures in $ Millions except per unit amounts, percent change and gallons sold. Source: company 10-Q, 10-K, 8-K filings and author estimates. Net income included expenses of $1.1 million and $4.3 million in 3QFY15 and 3QFY14, respectively, related to integration of the retail propane business acquired from Inergy L.P for ~$1.9 billion in August 2012. For 3QFY14, net income also included an $11.6 million loss on debt extinguishment. Adjusted EBITDA excludes the effects of these charges, as well as the unrealized (non-cash) mark-to-market adjustments on derivative instruments. SPH was able to decrease its investment in working capital in the trailing twelve months (“TTM”) ended 6/30/15, with lower commodity prices significantly reducing both inventories and accounts receivable. This resulted in a sharp increase in net cash from operations, as shown in Table 3: Table 3: Figures in $ Millions. Source: company 10-Q, 10-K, 8-K filings and author estimates. To enable comparison of DCF, investors must generate their own estimates because, as previously noted, SPH does not utilize this metric. Table 4 below provides my estimate of sustainable DCF generated by SPH in the periods under review, as well as my estimate of what SPH’s reported DCF would have been had it adopted a methodology similar to that used by some other MLPs (see article titled ” Distributable Cash Flow” ). Most of the MLPs I follow exclude working capital changes, whether positive or negative, when deriving their reported DCF numbers. This is one of the differences between DCF as is typically reported by MLPs and sustainable DCF. The relevant numbers for SPH are as follows: Table 4: Figures in $ Millions. Source: company 10-Q, 10-K, 8-K filings and author estimates. The two corresponding coverage ratios are as follows: Table 5: Figures in $ Millions except coverage ratio. Source: company 10-Q, 10-K, 8-K filings and author estimates. For the TTM ended 6/30/15 there were no material differences between DCF (excluding the impact of working capital changes and risk management activities, as it is generally reported by MLPs) and what I call sustainable DCF. Coverage of distributions ratio was positive (above 1x). Sustainable DCF shows a marked improvement over the TTM ended 6/30/14, primarily due to $82 million that was required for working capital in that earlier period. Table 6 presents a simplified cash flow statement that nets certain items (e.g., acquisitions against dispositions, debt incurred vs. repaid) and separates cash generation from cash consumption in order to get a clear picture of how distributions have been funded. It provides further insights on changes in coverage ratios. (click to enlarge) Table 6: Figures in $ Millions. Source: company 10-Q, 10-K, 8-K filings and author estimates. Table 6 indicates that net cash from operations, less maintenance capital expenditures, exceeded distributions by $104 million in the TTM ended 6/30/15, but fell short of covering distributions by $63 million in the TTM ended 6/30/14. Cash reserves were used to fund the shortfall. Table 7 provides selected metrics comparing the MLPs I follow based on the latest available TTM results. Of course, investment decisions should be take into consideration other parameters as well as qualitative factors. Though not structured as an MLP, I include KMI as its business and operations make it comparable to midstream energy MLPs. As of 08/26/15: Price Current Yield TTM Adjusted EBITDA EV / TTM Adj. EBITDA IDR- Adjusted EV/Adj. EBITDA Long-term debt (net of cash) to TTM Adj. EBITDA Buckeye Partners (NYSE: BPL ) $69.00 6.74% 844 14.7 14.7 4.2 Boardwalk Pipeline Partners (NYSE: BWP ) $12.89 3.10% 672 10.0 10.1 5.2 Enterprise Products Partners (NYSE: EPD ) $27.29 5.57% 5,239 14.6 14.6 4.1 Energy Transfer Partners (NYSE: ETP ) $46.86 8.83% 5,308 9.0 10.4 5.2 Kinder Morgan Inc. (NYSE: KMI ) $30.80 6.36% 7,373 15.2 15.2 6.0 Magellan Midstream Partners (NYSE: MMP ) $68.29 4.33% 1,102 17.1 17.1 3.0 Targa Resources Partners (NYSE: NGLS ) $27.38 12.05% 1,065 9.5 10.7 4.8 Plains All American Pipeline (NYSE: PAA ) $33.23 8.37% 2,229 10.3 12.8 4.3 Suburban Propane Partners $35.74 9.93% 332 9.8 9.8 3.3 Williams Partners (NYSE: WPZ ) $37.52 9.06% 3,681 10.6 12.3 4.6 Table 7: Enterprise Value (“EV”) and TTM EBITDA figures are in $ Millions. Source: company 10-Q, 10-K, 8-K filings and author estimates. Note that BPL, EPD, KMI, MMP and SPH are not burdened by general partner incentive IDRs that siphon off a significant portion of cash available for distribution to limited partners (typically 48%). Hence multiples of MLPs without IDRs can be expected to be much higher (see Table 4, column 5). In order to make the multiples somewhat more comparable, I added column 6, a second EV/EBITDA column. I derived this column by subtracting IDR payments from EBITDA for the TTM period. Other approaches can also be used to adjust for the IDRs of the relevant MLPs. In prior articles I expressed concerns regarding the susceptibility of SPH to weather conditions, volatile commodity costs, customer migration to natural gas or electricity, difficulties encountered by SPH in passing on higher propane costs to its customers, flat distributions since February 2013 and lack of a clear path to achieving distribution growth. These concerns are still valid, although some are mitigated by lower oil prices. But while the midstream MLP universe has been violently shaken by the decline in the price of oil, SPH has demonstrated less volatility and has performed better than the Alerian MLP Index over the past 12 months (19.5% decrease in unit price vs. a 35.5% decline in the index). Furthermore, the outperformance has been consistent whether measured on a 12-months, year-to-date, 6-months, 3-months or 1-month basis. Although SPH may not offer distribution growth and will probably underperform the index if we see sustained increases in MLP price levels, its ~10% yield appears secure, its valuation multiple is lower and it is less leveraged (3.3x long terms debt, net of cash, over TTM EBITDA). Investors brave enough to broaden their exposure to midstream energy MLPs should consider initiating, or adding to, positions in SPH. Disclosure: I am/we are long EPD, ETP, MMP, NGLS, PAA. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.