SPH

Business Context and Reporting Period

Company: Suburban Propane Partners, L.P.
Filing Type: Form 10-K (Annual Report)
Period Ended: September 29, 2007 (52 weeks)
Business Overview: A nationwide marketer and distributor of propane, fuel oil, refined fuels, natural gas, and electricity. The company also provides HVAC services. As of period end, it served approximately 1,000,000 active customers through 300 locations in 30 states. The company is the fourth largest retail marketer of propane in the U.S.

Key Financial Metrics

Material Changes Versus Prior Period

• Revenue Decline: Total revenues decreased 13.1% to $1,439.6 million. This was driven by lower volumes across all segments due to customer conservation in a high-price environment and strategic exits from lower-margin businesses (specifically diesel and gasoline in the fuel oil segment and certain commercial/industrial propane accounts).
• Profitability Increase: Despite lower revenues, Net Income increased 40.3% to $127.3 million. This was primarily due to a $49.5 million reduction in operating and general/administrative expenses resulting from field realignment, workforce reductions, and fleet optimization initiated in prior years.
• Volume Trends: Retail propane volumes sold decreased 7.3% to 432.5 million gallons. Fuel oil and refined fuels volumes decreased 28.2% to 104.5 million gallons.
• Weather Impact: Average temperatures in service territories were 6% warmer than normal in 2007, compared to 11% warmer than normal in 2006. Despite colder weather relative to the prior year, volumes declined due to conservation and mix changes.

Guidance, Outlook, and Risks

• Outlook: Management anticipates sufficient funds to meet obligations based on current cash position, $124.0 million in available borrowing capacity, and expected operating cash flows. Anticipated cash requirements for fiscal 2008 include ~$25.0 million in capital expenditures, ~$37.0 million in interest/taxes, and ~$98.1 million in distributions.
• Subsequent Event: On October 2, 2007, the company sold its Tirzah, South Carolina underground propane storage cavern and pipeline for approximately $54.0 million in net proceeds. A gain of approximately $40.0 million is expected to be reported in the first quarter of fiscal 2008.
• Key Risks:
  • Weather Sensitivity: Demand is highly seasonal and dependent on winter severity; warm winters significantly reduce volumes.
  • Commodity Price Volatility: Profitability depends on the spread between product cost and retail price. The company uses hedging to manage risk but cannot guarantee margins.
  • Competition: Highly fragmented industry with competition from natural gas, electricity, and other propane distributors.
  • Environmental Liabilities: Accrued environmental liabilities were $2.6 million as of period end, with potential for additional costs from unknown contamination.

Investor Verification Checklist

• Volume vs. Margin Trade-off: Verify the sustainability of margin improvements given the strategic reduction in total sales volumes.
• Weather Normalization: Assess the impact of the 2007 heating season (6% warmer than normal) on future revenue projections compared to the 2006 season (11% warmer).
• Debt Covenants: Confirm continued compliance with the Revolving Credit Agreement leverage ratio (Total Debt/EBITDA < 4.0) and interest coverage ratio (EBITDA/Interest > 2.5).
• Pension Plan Status: Note the $25.0 million voluntary contribution made in 2007 to fully fund the accumulated benefit obligation, resulting in an overfunded status of $5.5 million.
• Discontinued Operations: Review the pending $40.0 million gain from the Tirzah storage facility sale to be recognized in Q1 2008.