SPH

Business Context and Reporting Period

Company: Suburban Propane Partners, L.P.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and nine months ended June 30, 2001.
Business Overview: The Partnership acquires and operates propane businesses, including retail sales, wholesale, and related services (heating, air conditioning, and appliance sales). The business is highly seasonal, with cash flows typically stronger in winter and spring.

Key Financial Metrics

Note: Debt figures include $42.5 million current portion of long-term borrowings and $430.3 million long-term borrowings as of June 30, 2001.

Material Changes vs. Prior Period

• Quarterly Revenue Decline: Revenues decreased 6.9% to $143.3 million compared to the prior year quarter. This was driven by warmer weather (14% warmer than normal) reducing retail propane demand and customer conservation efforts due to high prices.
• Quarterly Loss: The Partnership reported a net loss of $14.6 million for the quarter, compared to a loss of $10.7 million in the prior year. A significant factor was a $5.1 million unrealized loss on derivative instruments due to the adoption of SFAS 133.
• Year-to-Date Growth: For the nine months, revenues increased 22.4% to $790.0 million, and net income rose to $75.3 million (vs. $56.6 million prior year). This growth was fueled by higher propane sales prices and colder temperatures (3% colder than normal) during the heating season.
• Debt Reduction: Net interest expense decreased due to lower outstanding borrowings. The Partnership utilized $47.1 million in proceeds from a public offering of Common Units to pay down its revolving credit facility.

Guidance, Outlook, and Risks

• Accounting Changes: The Partnership adopted SFAS 133 (Derivatives) effective October 1, 2000. Derivatives are now marked-to-market through income, resulting in volatility in reported earnings (e.g., the $5.1 million quarterly loss).
• Distributions: The Partnership announced a quarterly distribution of $0.55 per Common Unit for the third quarter of fiscal 2001, payable August 14, 2001. This includes the minimum quarterly distribution of $0.50 plus an additional $0.05.
• Liquidity and Debt: The Partnership expects sufficient funds to meet obligations and maintain distributions for the remainder of fiscal 2001. However, a $42.5 million principal payment on Senior Notes is due June 30, 2002. Management intends to refinance this amount but cannot guarantee favorable terms.
• Market Risks: Significant exposure to weather conditions affecting demand and fluctuations in propane unit costs. A sensitivity analysis indicated a hypothetical 10% adverse price change could result in a $0.8 million loss in future earnings.
• Contingencies: The Partnership is self-insured for certain liabilities up to predetermined amounts, with accrued insurance liabilities totaling $26.1 million as of June 30, 2001.

Investor Verification Checklist

• Derivative Impact: Verify the magnitude of unrealized gains/losses on derivatives under SFAS 133 and their effect on reported net income versus cash flow.
• Debt Refinancing: Monitor progress on refinancing the $42.5 million Senior Note principal payment due June 30, 2002.
• Weather Sensitivity: Assess the correlation between regional weather patterns and quarterly revenue volatility.
• Capital Allocation: Review the use of proceeds from the recent public offering ($47.1 million) and its impact on leverage ratios.
• Self-Insurance Exposure: Evaluate the adequacy of the $26.1 million accrued insurance liability against potential future claims.