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Executives

Davin D’Ambrosio – Vice President and Treasurer

Mike Dunn – President and CEO

Mike Stivala – Chief Financial Officer

Analysts

Gabriel Moreen – Bank of America-Merrill Lynch

Suburban Propane Partners LP (SPH) F2Q2012 Results Earnings Call May 3, 2012 9:00 AM ET

Operator

Ladies and gentlemen, thank you for holding. Welcome to the Second Quarter 2012 Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. (Operator Instructions)

As a reminder, the conference call is being recorded. 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 and predictions, and financial condition, and results of operations.

These forward-looking statements involve risks and uncertainties. The Partnership have 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.

At this time, I would now like to turn the conference over to your host, Mr. Davin D'Ambrosio. Please go ahead, sir.

Davin D'Ambrosio

Thank you, [Eddie], and good morning, everyone. Welcome to Suburban’s fiscal 2012 second quarter results conference call. I’m Davin D’Ambrosio, Vice President and Treasurer at Suburban. Joining me this morning is Mike Dunn, President and Chief Executive Officer; and Mike Stivala, our Chief Financial Officer. The purpose of today’s call is to review our second quarter financial results, along with our current outlook for the 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 24, 2011 and its Form 10-Q for the period ended March 24, 2012, which will be filed by the end of business today. Copies of these filings may be obtained by contacting the Partnership or the SEC.

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

Additionally, today we have filed the Form 8-K in connection with the previously announced acquisition of the Inergy LP’s retail propane business and assets. The Form 8-K will include audited financial statements of Inergy Propane LLC through the fiscal year ended September 30, 2011, and the unaudited financial statements as of -- and for the six months ended March 31, 2012 as well as unaudited pro forma condensed combined financial statements to reflect the Inergy Propane acquisition.

At this point, I’d like to get the call started by turning it over to Mike Dunn for some opening remarks. Mike?

Mike Dunn

Thanks, Davin, and thanks everyone for joining us this morning. Results for the second quarter of fiscal 2012 were significantly affected by record warm temperatures across most of the country and in particular, our service territories.

In fact, the period from January through March 2012 was reported by [Noah] as being the warmest on record in the record in the contiguous United States, capped off by the warmest March on record. These record warm temperatures follow the considerably warmer than normal temperatures experienced in the fiscal 2012 first quarter, making the fiscal 2012 heating season one of the most challenging six month periods faced by the industry.

That being said, the steps we have taken over the past several years to streamline our operating platform drive operating efficiencies and strengthen our balance sheet, helped us navigate through this very challenging period.

Additionally, our patience and discipline over the years put us in the position to make the recent announcement of our agreement to acquire the retail propane assets and operations of Inergy LP for approximately $1.8 billion. Once completed, this acquisition effectively doubles the size of Suburban and expands our geographic reach into 11 new states.

These transactions supports our growth strategy as we look to leverage our technology platform and combine the talent and resources and best practices of the two organizations in order to drive significant operating synergies.

In a moment, I will comment more on our thoughts regarding this exciting opportunity. However, at this point, I would like to turn the call over to Mike Stivala to discuss our second quarter results in more detail. Mike?

Mike Stivala

Thanks Mike and good morning everyone. As we discuss our second quarter results to be consistent with our previous reporting, I’m excluding the impact of unrealized non-cash mark-to-market adjustments from derivative instruments used in risk management activities under FAS 133 accounting, which resulted in a de minimus amount in the second quarter of fiscal 2012, compared to an unrealized gain of $4.1 million in the prior second quarter.

Additionally, net income and EBITDA for the fiscal 2012 second quarter included $2.1 million non-cash charge for the write-off of capitalized cost associated with an abandoned software project for our natural gas and electric segment as well as the $500,000 loss on debt extinguishment associated with the amendment of our revolving credit facility which was completed in January 2012.

These charges compared to a $2 million charge for severance costs associated with the realignment of our field operations, which was recorded in the second quarter of fiscal 2011. Therefore, adjusted EBITDA for our fiscal 2012 second quarter amounted to $65.9 million, a decrease of $47.7 million compared to $113.6 million for the second quarter of fiscal 2011.

Net income totaled $49.6 million or a $1.39 per common unit for the second quarter of fiscal 2012, compared to net income of $96.2 million or $2.71 per common unit in the prior year second quarter.

Retail propane gallons sold in the second quarter of fiscal 2012 decreased 24.1 million gallons, or 21.1%, to 89.9 million gallons from 114 million gallons in the prior year second quarter.

Sales of fuel oil and other refined fuels decreased 5.6 million gallons, or 34.6%, to 10.6 million gallons compared to 16.2 million gallons in the prior year second quarter. The primary factor contributing to the volume decline was the lack of cold weather across all of our service territories, coupled with ongoing customer conservation attributable to continued high commodity prices and the sluggish economy.

For the quarter, average temperatures were 16% warmer than normal and 17% warmer than the prior year second quarter. In our northeast and southeast operating territories, average temperatures for the quarter were 23% and 25% warmer respectively compared to the prior year second quarter.

In the commodity markets, average posted prices for propane for the second quarter of fiscal 2012 decreased 9.8% compared to the prior year second quarter, while average fuel oil prices increased 12.3% compared to the prior year second quarter. On a sequential basis, propane prices decreased 12.7% compared to the average prices in our fiscal 2012 first quarter.

Total gross margins of $149.2 million for the second quarter of fiscal 2012 were $50.9 million or 25.4% lower than the prior year second quarter of $200.1 million, primarily as a result of lower volumes sold.

Combined operating and G&A expenses of $85.5 million or $1.1 million or 1.3% lower than the prior year, primarily due to lower variable compensation attributable to lower earnings as well as continued savings in payroll and benefit-related costs and insurance costs, offset to an extent by the $2.1 million non-cash charge that I mentioned earlier.

Excluding these $2.1 million non-cash charge in the fiscal 2012 second quarter, operating and G&A expenses would have decreased by $3.2 million or 3.7%.

As for bad debts, we remain diligent about managing our receivables, especially considering the current economic environment. Our overall bad debt expense as a percentage of revenue and our aging profile has remained relatively consistent with historical levels.

Depreciation and amortization expense for the fiscal 2012 second quarter of $7.6 million decreased $800,000, compared to the prior year second quarter, primarily as a result of accelerated depreciation expense recorded in the prior year second quarter for vehicles taken out of service.

Net interest expense of $6.4 million for the second quarter of fiscal 2012 was $400,000 lower than the prior year second quarter, as a result of lower borrowing rates attributable to the amendment to our credit facility completed in January 2012. Total capital spending for the quarter was $4 million, which included $3.4 million of maintenance capital.

Turning to our balance sheet, we continued to fund all working capital requirements with cash on hand, as we've now moved through the historically high period of seasonal working capital needs, which peaked in early February, we once again did not access our bank revolver and in fact, we ended the quarter with over $96 million of cash on hand. Even with the lower earnings, our overall leverage of 3.1 times debt-to-EBITDA remains well below our peer group.

Finally, to comment a bit on the financing activities associated with the announced acquisition of the retail propane operations of Inergy, our strategy is to finance the transaction with a good mix of debt and equity with $1 billion of new Suburban senior notes, $600 million of new Suburban common units issued to Inergy, the majority of which will be distributed by Inergy to its unit holders and approximately $250 million in new common units expected to be issued in a secondary public offering subject to market conditions.

Our financing strategy also contemplates the preservation of our on hand cash to fund incremental working capital and capital expenditures for integrating the businesses. Furthermore, with the support of our bank group, we have secured the necessary consent and amendments required within our current credit agreement to complete this transaction and have also arranged for a $250 million, 364-day term loan facility, which will be used only in the event of secondary public offering, is not completed prior to closing.

Finally, in recognition of our increased size and incremental working capital needs, we have received commitments from certain lenders under our existing credit agreement to increase the capacity of the revolving credit facility from $250 million to $400 million subject to closing of the acquisition. Back to you, Mike.

Mike Dunn

Thanks, Mike. As announced in our April 19th press release, we were pleased to declare our quarterly distribution of $0.8525 per common unit, which equates to an annualized rate of $3.41 million per common unit. This quarterly distribution will be paid on May 8 to our unitholders of record as of May 1st.

Additionally, in connection which is approval of the Inergy Propane acquisition on April 25, 2012, our board of supervisors approved an increase in our annualized distribution rate to $3.50 per common unit conditioned on the closing of this transaction, which represents an increase of $0.09 per common unit or 2.6% compared to our current annualized distribution rate.

The distribution at the increased rate will be effective for the quarterly distribution paid in respect of the first quarter of fiscal 2013 ending December 29, 2012, and that is assuming a closing by the applicable record date.

Looking ahead to the remainder of fiscal 2012, we expect that volumes and margins will stay on the pressure for the reminder of the year, given the lack of weather and the continued state of the economy.

Nonetheless, we are confident that we will be able to respond to the current challenges based upon the strength of our balance sheet, a flexible cost structure and our customer focused operating platform. The Inergy Propane acquisition is a transforming event for Suburban. This transaction will add over 600,000 propane customers that are currently being serviced at 338 managed locations.

On a combine basis, we believe we will be the third largest retail propane market in the United State servicing over 1.2 million customers in 41 states. We expect to close sometime in our fourth fiscal quarter follow completion -- following completion of the bond exchange transaction announced in connection with the acquisition as well as obtaining the necessary regulatory approvals under the Hart-Scott-Rodino Antitrust Act and other customer conditions to closing.

In the meantime, we are in the process of refining a detailed integration plan aimed at a smooth transition for our customers and our employees both new and existing.

In closing, I would like to take this opportunity to acknowledge the ongoing hard work of all of our dedicated employees and their continuing efforts to effectively manage the business through these challenging times, while providing exceptional customer service.

We look forward to welcoming the employees of Inergy Propane as we work together to combine the best of both companies, leveraging our investments in people and technology across the expanded geography and larger customer base to create further opportunities for growth and unitholder values.

As always, we appreciate your support and attention this morning. I would now like to open this call up for questions. [Eddie]?

Question-and-Answer Session

Operator

(Operator Instructions) So we have a question from the line of Gabriel Moreen. Please go ahead.

Gabriel Moreen – Bank of America-Merrill Lynch

Hi. Morning, everyone.

Mike Dunn

Thank you, Gabe.

Gabriel Moreen – Bank of America-Merrill Lynch

I know it’s kind of the usual question to ask in terms of separating out same store sales versus the weather effect here, given how crazy the weather effect was this past winter, using the season or lack thereof. Any guesstimate -- guesstimate I guess conservation leaving aside the weather or is it just too hard to speculate?

Mike Dunn

I mean in the same store sales, our same store sales. And I think these filed acquisitions that we did in the last two years were very small. So they won’t have a meaningful impact on the number.

Gabriel Moreen – Bank of America-Merrill Lynch

No. I’m just saying, Mike, outside the weather effect, in terms of conservation?

Mike Stivala

I think the primary driver was certainly the weather, Gabe. I mean, generally there is continued customer conservation given the elevated price of the commodity in the tough economy, but no more so than you have experience for the past several years. But really the story for this quarter is clearly the weather.

Gabriel Moreen – Bank of America-Merrill Lynch

Right.

Mike Dunn

And if anything, Gabe, the weather reduced conservation.

Gabriel Moreen – Bank of America-Merrill Lynch

Right. Right. Okay. That’s all I have. Thanks, guys.

Mike Dunn

Thanks, Gabe.

Operator

(Operator Instructions) Sir, no questions in queue at this time.

Mike Dunn

All right. With that shared, I want to -- again, thank everyone for joining us this morning and we look forward to the next call. Thank you.

Operator

Ladies and gentlemen, this conference will be available for replay after 11 AM today until May 10, 2012 at midnight. You may access the AT&T Executive Playback Service at any time by dialing 1-800-475-6701 and entering the access code 244757. International participants may dial in on 1-320-365-3844. Again, those numbers are 1-800-475-6701 and international is 1-320-365-3844. That does conclude the call today. Thanks you for your participation and for using AT&T Executive Teleconference Services. You may now disconnect.

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