SPH

Business Context and Reporting Period

Company: Suburban Propane Partners, L.P.
Filing Type: Form 10-K (Annual Report)
Period Ended: September 26, 2009
Business Overview: The Partnership is a nationwide marketer and distributor of propane, fuel oil, refined fuels, natural gas, and electricity. It serves approximately 850,000 active customers through roughly 300 locations in 30 states. The business is highly seasonal, with approximately two-thirds of retail propane volume sold during the October–March heating season.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Revenues decreased 27.4% to $1.143 billion, driven primarily by a 51.7% drop in average propane prices and a 46.1% drop in fuel oil prices. Volume declines also contributed, with propane sales down 11.0% and fuel oil sales down 25.0% due to customer conservation and economic recession impacts on commercial/industrial accounts.
• Profitability Increase: Despite lower revenues, Net Income increased 6.6% to $165.2 million. This was achieved because the decline in product costs outpaced the decline in selling prices, improving gross margins. Additionally, fiscal 2008 included a $43.7 million gain from the sale of discontinued operations (Tirzah storage cavern) which was not present in 2009.
• Debt Reduction: Total debt decreased by approximately $185 million. The Partnership repurchased $175 million of its 6.875% Senior Notes via a cash tender offer and refinanced its credit facility, reducing annual interest expense requirements by approximately $12.0 million.
• Capital Structure: The Partnership issued 2.43 million Common Units in a public offering, raising $95.9 million in net proceeds, which were used to fund the debt repurchase.

Guidance, Outlook, and Risks

• Outlook: Management anticipates sufficient funds to meet obligations for fiscal 2010 based on current cash, credit facility availability ($92.8 million), and expected operating cash flows. No borrowings under the credit facility are currently expected for working capital needs.
• Key Risks:
  • Weather Sensitivity: Demand is heavily dependent on winter weather severity. Warmer winters significantly reduce volumes and profitability.
  • Commodity Price Volatility: Profitability depends on the spread between product cost and retail price. The Partnership uses hedging strategies but remains exposed to rapid price changes.
  • Regulatory Changes: Potential climate change legislation (e.g., cap-and-trade) could increase operating costs. Derivatives legislation could restrict hedging activities or increase capital requirements.
  • Competition: The retail propane and fuel oil markets are highly competitive and fragmented, with competition from natural gas and electricity.
• Unusual Items: Fiscal 2009 included a $4.6 million loss on debt extinguishment related to the tender offer. Fiscal 2008 included a $43.7 million gain on the disposal of discontinued operations.

Investor Verification Checklist

• Weather Normalization: Verify the impact of heating degree days on volume trends, as fiscal 2009 was 5% colder than 2008, partially offsetting volume declines.
• Debt Covenants: Confirm continued compliance with the Revolving Credit Facility covenants (Interest Coverage Ratio ≥ 2.5:1; Leverage Ratio ≤ 4.5:1).
• Environmental Liabilities: Review the $1.7 million accrued environmental liability and potential for additional remediation costs at acquired sites.
• Pension Funded Status: Note the decline in the funded status of the defined benefit pension plan to a $17.1 million underfunded position due to lower interest rates.
• Executive Compensation: Review the separation agreement for former CEO Mark Alexander and the succession plan for Michael J. Dunn, Jr., including associated severance and consulting fees.