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Suburban Propane Partners L.P. (NYSE:SPH)

Q1 2009 Earnings Call

May 7, 2009; 9:00 am ET

Executives

Davin D’Ambrosio - Vice President & Treasurer

Mark Alexander - Chief Executive Officer

Mike Dunn - President

Michael Stivala - Chief Financial Officer & Chief Accounting Officer

Analysts

Darren Horowitz - Raymond James

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Suburban Propane second quarter 2009 financial results conference call. For the conference, all the participants are in a listen only mode. However there will be an opportunity for your questions and instructions will be given at that time. (Operator Instructions)

Ladies and gentlemen, this conference call contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended, relating to the partnership’s future business expectations, predictions, financial condition and results of operations.

These forward-looking statements involve certain risks and uncertainties. The partnership has listed some of the important factors that could cause actual results to differ materially from those discussed in such forward-looking statements which are referred to as cautionary statements in its earnings press release which can be viewed on the company’s website.

All subsequent written and oral forward-looking statements attributable to the partnership or persons acting on its behalf are expressly qualified in their entirety by such cautionary statements.

Now with that being said, I’ll turn the conference over to Mr. Davin D’Ambrosio. Please go ahead sir.

A. Davin D’Ambrosio

Thank you John and good morning everyone. Welcome to Suburban’s fiscal 2009 second quarter conference call. I’m Davin D’Ambrosio, Vice President and Treasurer at Suburban. Joining me this morning is Mark Alexander, our Chief Executive Officer; Mike Dunn, President; and Michael Stivala, our Chief Financial Officer and Chief Accounting Officer.

The purpose of today’s call is to review our second quarter financial results, along with the current outlook for our business. As usual, once we’ve concluded our prepared remarks we will open the session to questions. However before getting started, I would like to reemphasize what the operator has just explained about forward-looking statements.

Additional information about factors that could cause actual results to differ materially from those discussed in forward-looking statements, is contained in the partnership’s SEC filings, including its Form 10-K for the fiscal year ended September 27, 2008 and its Form 10-Q for the period ended March 28, 2009, which will be filed by the end of business today. Copies of these filings maybe obtained by contacting the partnership or the SEC.

Certain non-GAAP measures will be discussed on this call. We have provided a description of those measures, as well as a discussion of why we believe this information to be useful in our Form 8-K which was furnished to the SEC this morning. The Form 8-K can be accessed through a link on our website at www.suburbanpropane.com.

At this point I’d like to get started by turning the call over to Mike Dunn. Mike.

Michael Dunn

Thanks Davin, and thanks everyone for joining us this morning. We are very pleased to deliver another solid quarter with adjusted EBITDA of $142 million, an increase of 25% over the prior year’s second quarter.

While sales volume continued to be adversely affected by the recession, particularly in our commercial and industrial segments, our earnings benefited from higher margins resulting from the continued decline in commodity prices.

With the increased level of earnings coupled with lower working capital needs from the generally lower commodity price environment, we ended the second quarter of fiscal 2009 with $235.5 million of cash on hand, further strengthening our liquidity position.

Additionally, as we announced on April 23, our Board of Supervisors increased our annual distribution rate by $0.02 per common unit to $3.26, representing our 12th consecutive quarterly distribution increase, more than 5% growth rate over the prior year’s second quarter.

With the fiscal 2009 heating season now behind us, and as we head into the time of the year in which we generally have a higher concentration of non-residential activity, we expect the prolonged recession to present further operating challenges. The absence of commodity price volatility, coupled with a more competitive marketplace, leads us to believe the higher margin levels experienced in the first and second quarters might be difficult to sustain long term.

A little later I’ll comment further on our outlook for the business, at this point however I will turn the call over to Mike Stivala, to discuss our second quarter results in more detail. Mike.

Michael Stivala

Thanks Mike and good morning everyone. As Mike stated, while the current state of the economy has certainly had its effect on our operations, we are extremely pleased with our operating results for the second quarter and through the first six months of fiscal 2009.

As we’ve seen throughout this prolonged recession, we are well positioned to handle these challenges; thanks to our efficient operating platform, flexible cost structure and the strength of our balance sheet. In fact as Mike stated, with over $235 million in cash on hand, we firmly believe we’re in an advantageous position, despite the ongoing uncertainty in the financial markets.

As we discussed in our second quarter results, to be consistent with previous reporting, I am excluding the impact of a $9.7 million unrealized non-cash loss applicable to FAS 133 accounting, compared to an unrealized loss of $2.3 million in the prior year quarter.

EBITDA for our second quarter of fiscal 2009 totaled $142 million compared to $113.8 million for the second quarter of fiscal 2008. Net income totaled $124.6 million or $3.79 per common unit for the quarter, compared to net income of $96.8 million or $2.96 per common unit in the prior year’s second quarter.

Retail propane gallons sold in the second quarter of fiscal 2009 decreased 11.8 million gallons or 8% to 134.5 million gallons from 146.3 million gallons in the prior year. Sales of fuel oil and other refined fuels decreased 7.3 million gallons or 23% to 24.1 million gallons compared to 31.4 million gallons in the prior year.

Overall, average heating degree days and our areas of operations were at normal levels for the second quarter of fiscal 2009 and 5% colder than the prior year quarter. The favorable impact of colder average temperatures was more than offset by declines in commercial and industrial volumes resulting from the recession, and to a lesser extent continued customer conservation.

Within the Propane segment, our non-residential customer base accounted for more than 60% of the volume decline compared to the prior year quarter. In the commodities markets, while average posted prices for propane and fuel oil were 54% and 51% lower respectively than the prior year second quarter, prices were relatively volatile throughout much of the quarter.

As a result of the continued price volatility, the higher unit margin environment that was experienced during the first quarter of fiscal 2009 across the entire industry, continued throughout the second quarter. Today’s spot propane is trading at about $0.57 basis Mt. Bellevue and spot heating oil is trading around $1.45.

Total gross margins of $246.6 million for the second quarter of fiscal 2009, were $38 million or 18% higher than the prior year’s second quarter of $208.6 million, primarily as a result of higher unit margins, as well as higher margins from risk management activities resulting from the declining commodity environment, offset to an extent by the lower volumes.

Combined operating and G&A expenses of $104.6 million for the second quarter of fiscal 2009 were $9.8 million or 10% higher than the prior year, primarily due to higher variable compensation attributable to the higher earnings, partially offset by savings and payroll and vehicle expenses from our continued operating efficiencies at lower fuel costs.

Our bad debt expense continues to be well positioned and our agent profile remains relatively consistent as we maintain a diligent focus on managing receivables in these obviously though economic times. Total capital spending for the quarter was $3.9 million, which included $2 million of maintenance capital.

Turning to the balance sheet. Our continued strong operating results and corresponding cash flow have again allowed us to fund all working capital requirements, with internally generated cash. In fact, during the first half of fiscal 2009, our cash flow from operations was more than $150 million higher than the comparable prior year period, reflecting the higher earnings and lower investment in working capital? Once again we do not pursue the need to access our bank revolver for the remainder of the fiscal year.

As for our debt profile, the $425 million of senior debt does not mature until December 2013. Our revolving credit facility which includes the $108 million outstanding under the term loan and access to revolving credit as needed matures in March of 2010. As stated on our last call, we’ve already began to work closely with our bank group on a strategy for its renewal. Mike.

Michael Dunn

Thanks Mike. Our quarterly distribution to the most recently increased level of $81.5 per common unit will be paid on May 12 to our unit holders of record as of May 5. Again, this increase represents a 5% year-over-year growth of distributions compared to the second quarter of last year. With our increased earnings, our distribution coverage at the end of this quarter is 1.69 times.

Looking forward into the second half of this year, we expect the recession to continue to have a negative impact on volumes, given the typical shift in our mix of business. Additionally we remain realistic that retail margins may experience some pressure in the coming quarters and into the next fiscal year.

Our proven ability to effectively manage our business, coupled with our solid financial position, puts us in a very enviable position, one which we hope to be able to capitalize of. Through the ongoing effects of our dedicated employees, especially our operating personnel, we remain committed to our ongoing strategy of delivering increasing value to our unit holders.

As always, we appreciate your support and attention this morning and I would now like to open the call up for questions. John, can you help us with that?

Question-and-Answer Session

Operator

(Operator Instructions) You have one from the line of Darren Horowitz; please go ahead.

Darren Horowitz - Raymond James

Yes, good morning guys. Congratulations on the quarter.

Michael Stivala

Hey Darren thanks.

Darren Horowitz - Raymond James

Mike for you, can you give us a sense for how are you seeing continued customer conservation and economic deterioration on the commercial side of the business is going to impact the back half of fiscal ’09 volumes. Do you think it’s still fair to assume that maybe the total volume decline in aggregate is around 7% or 8% year-over-year?

Michael Stivala

I think with the weight on our mix in the second half of the year, you probably will see something closer to 12% and I think that that would be legitimately skewed towards the commercial and industrial sector.

Darren Horowitz - Raymond James

Okay. Is there any further waiting whether you think it’s going to be the June quarter or more the September quarter?

Michael Stivala

I would suspect that you’ll probably see it in May, June and then possibly start to come out of that as we get closer to September.

Darren Horowitz - Raymond James

Okay. Shifting over to the liquidity profile, can you give us a little bit more insight as to how the discussions are going regarding refinancing that revolver? I mean, when you look at the two different components, as you pointed out with the current loan and the working cap piece, you’re not really using that, so I would imagine that kind of when you’re balancing a lot of the different options here, it might mean that in aggregate the revolver is a bit less when you come out of this thing in March, is that kind of fair to assume?

Michael Stivala

Yes, it is fair to assume. The difficulty we’re having actually is that the banks want to generate fees on top of everything else and I don’t say this with any sarcasm and unfortunately with the way the markets are today, it’s a moving target. We’re comfortable with everything that we have and we’re going to begin the process next week actually, but you’re right; I mean the absolute amount of money that we need, we are looking at very flexibly.

Darren Horowitz - Raymond James

Sure, and then just one big picture question for you and I know Mark always likes to jump in on this too, but when you look at the cash balance and obviously how things have changed from a competitive standpoint, how does the current acquisition market look. I mean, have any opportunities come to the forefront? Have you seen some concession in terms of what sellers are asking; in terms of multiples for their business or has anything changed?

Michael Stivala

Well, no actually. You are seeing more people come to the market to kind of feel it out; these are the smaller operators. Their ideas on value are probably a little inflated quite frankly, with where the real market should be based on the cost of capital and the case that I think everyone experienced at least so far on margins. However, there is a lot as far as the mid to bigger players; there’s a lot of refinancing that has to be done over the course of next 18 months. I’ll be curious to see how most folks handle that.

Mark Alexander

And Darren, I’ll jump in there. I agree with Mike.

Darren Horowitz - Raymond James

Mark thanks. I appreciate it guys. Keep up the good work.

Mark Alexander

Thanks Darren.

Operator

(Operator Instructions) And gentlemen, there are no further questions.

Mark Alexander

Okay John, thank you, and everyone that was on the call, we appreciate your support and we look forward to the next quarter.

Operator

Ladies and gentleman, that does conclude your conference for today. Thank you for your participation. You may now disconnect.

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