SPH

Business Context and Reporting Period

Company: Suburban Propane Partners, L.P.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 30, 2002 (Second Quarter of Fiscal 2002)
Business Overview: The Partnership is engaged in the retail distribution of propane and related products. The business is highly seasonal, with approximately two-thirds of retail propane volume sold during the peak heating season (October through March). Results for interim periods are not necessarily indicative of full-year results due to this seasonality.

Key Financial Metrics

Note: EBITDA figures are derived from Management's Discussion and Analysis text. Total Debt includes long-term borrowings and current portion of long-term borrowings.

Material Changes vs. Prior Period

• Revenue Decline: Revenues decreased 33.5% ($119.0 million) for the quarter and 35.8% ($233.0 million) for the six-month period compared to the prior year. This was driven by a 27% drop in average propane selling prices (due to lower commodity costs) and an 8.9% decline in retail volumes sold.
• Weather Impact: Unseasonably warm weather significantly reduced demand. Temperatures were 10% warmer than normal for the quarter and 13% warmer than normal for the six-month period, compared to colder-than-normal conditions in the prior year.
• Cost Management: Operating expenses decreased 10.7% for the quarter and 11.9% for the six-month period. Management successfully shifted costs from fixed to variable, particularly in employee compensation, and benefited from lower fuel costs.
• Accounting Change: The Partnership early-adopted SFAS No. 142 (Goodwill and Other Intangible Assets) effective September 30, 2001. This eliminated goodwill amortization, reducing depreciation and amortization expense by $1.9 million for the quarter and $3.7 million for the six-month period compared to the prior year.
• Asset Sale: The Partnership sold a non-strategic 170 million gallon storage facility in Hattiesburg, Mississippi, for net cash proceeds of approximately $8.0 million, resulting in a gain of $6.8 million.

Guidance, Outlook, and Risks

• Outlook: Management anticipates lower revenues and net income for the remainder of the fiscal year (April through September) due to the seasonal nature of the business. However, they expect sufficient funds to meet obligations based on current cash positions and $75.0 million in unused borrowing capacity under their Revolving Credit Agreement.
• Distributions: A quarterly distribution of $0.5625 per Common Unit was declared for the second quarter of fiscal 2002, payable May 14, 2002. This includes Incentive Distribution Rights (IDRs) to the General Partner.
• Debt Refinancing: The Partnership executed a Note Purchase Agreement to refinance the first annual principal payment ($42.5 million) of its Senior Notes due 2011. The new 10-year senior notes are priced at 7.37% with funding expected in June 2002.
• Key Risks:
  • Weather conditions impacting demand.
  • Fluctuations in the unit cost of propane.
  • Competition from other energy sources.
  • Ability to retain customers and control expenses.
  • Legal proceedings and regulatory developments.
• Market Risk: The Partnership uses futures, options, and forward contracts to hedge propane price risk. A hypothetical 10% adverse change in market prices could result in a potential loss of $1.7 million.

Investor Verification Checklist

• Weather Sensitivity: Verify the correlation between heating degree days and volume sales to assess future revenue volatility.
• Commodity Hedging: Review the specific terms of derivative instruments and the impact of mark-to-market adjustments on operating expenses.
• Debt Structure: Confirm the closing of the $42.5 million refinancing and the impact on future interest obligations.
• Cost Structure: Assess the sustainability of the shift from fixed to variable costs if volumes remain depressed.
• Goodwill Impairment: Monitor the annual impairment review required under SFAS 142, given the significant goodwill balance ($243.4 million).