Filed Pursuant to Rule 424(b)(5)
Registration File No.: 333-109714
Prospectus Supplement to Prospectus dated October 23, 2003.
2,600,000 Common Units
Representing Limited Partner Interests
[SUBURBAN PROPANE LOGO OMITTED]
SUBURBAN PROPANE PARTNERS, L.P.
--------------
We are offering 2,600,000 common units representing limited partner
interests in Suburban Propane Partners, L.P. Concurrently with this offering,
we are offering in a private placement $150.0 million aggregate principal
amount of our senior notes due 2013. This offering of common units is not
contingent upon our planned concurrent private placement of senior notes.
The common units are listed on the New York Stock Exchange under the
symbol "SPH." The last reported sale price of the common units on December 10,
2003 was $30.90 per common unit.
See "Risk Factors" beginning on page S-10 of this prospectus supplement
and page 3 of the accompanying prospectus to read about factors you should
consider before buying the common units.
--------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------------
Per Common Unit Total
--------------- --------------
Initial price to public ....................................... $ 30.90 $80,340,000
Underwriting discount ......................................... $ 1.31 $ 3,406,000
Proceeds, before expenses, to Suburban Propane Partners, L.P. . $ 29.59 $76,934,000
To the extent that the underwriters sell more than 2,600,000 common units,
the underwriters have the option to purchase up to an additional 390,000 common
units from us at the initial price to public less the underwriting discount.
--------------
The underwriters expect to deliver the common units in New York, New York
on December 16, 2003.
GOLDMAN, SACHS & CO.
WACHOVIA SECURITIES
RAYMOND JAMES
--------------
Prospectus Supplement dated December 10, 2003.
PROSPECTUS SUPPLEMENT SUMMARY
The following information supplements, and should be read together with,
the information contained or incorporated by reference in other parts of this
prospectus supplement and accompanying prospectus. The summary highlights
selected information from the prospectus supplement and accompanying
prospectus. As a result, it does not contain all of the information you should
consider before investing. You should carefully read this prospectus supplement
and accompanying prospectus, including the documents incorporated by reference,
which are described under "Where You Can Find More Information" in the
accompanying prospectus. Unless the context otherwise requires, references in
this prospectus to "Suburban," "we," "us" and "our" refer to Suburban Propane
Partners, L.P., its subsidiary operating partnership, Suburban Propane, L.P.,
and its wholly-owned subsidiaries. References to "Agway Energy" refer
collectively to Agway Energy Products LLC, Agway Energy Services, Inc. and
Agway Energy Services PA, Inc. In this prospectus supplement and accompanying
prospectus, we refer to the acquisition of substantially all of the assets and
operations of Agway Energy by Suburban as the "Acquisition."
SUBURBAN PROPANE PARTNERS
We are a national retail and wholesale marketer of propane and related
appliances, parts and services. We believe, based on LP/Gas Magazine dated
February 2003, that we are the third largest retail marketer of propane in the
United States, measured by retail gallons sold in 2002. During the fiscal year
ended September 27, 2003, we sold approximately 491.5 million gallons of
propane to retail customers and an additional 31.7 million gallons of propane
at wholesale to other distributors and large industrial end-users. As of
September 27, 2003, we served approximately 750,000 active residential,
commercial, industrial and agricultural customers through approximately 320
customer service centers in 40 states. During the 2003 fiscal year, we
generated revenues of $771.7 million, EBITDA of $110.0 million and cash flow
from operating activities of $57.3 million. After giving effect to the
Acquisition, which is described below, for the fiscal year ended September 27,
2003, we would have had pro forma revenues of $1.5 billion, pro forma EBITDA of
$150.9 million and pro forma cash flow from operating activities of $72.9
million. See "Summary Historical and Pro Forma Financial and Other Data" for
our calculation of EBITDA and Pro Forma EBITDA, as well as a reconciliation of
such EBITDA amounts to cash provided by operating activities.
Our operations are concentrated primarily in the east and west coast
regions of the United States. Our geographic diversity reduces our exposure to
weather conditions affecting a particular region. We own two propane storage
facilities: a 22 million gallon above-ground facility in Elk Grove, California
and a 60 million gallon underground facility in Tirzah, South Carolina. We are
supplied by approximately 70 oil companies and natural gas processors at more
than 180 supply points located in the United States and Canada. Together with
our predecessor companies, we have been continuously engaged in the retail
propane business since 1928.
In addition, we own Gas Connection, Inc., which operates twelve HomeTown
Hearth & Grill retail stores in the south, northeast and northwest regions of
the United States that sell and install natural gas and propane gas grills,
fireplaces and related accessories and supplies. We also own Suburban @ Home,
Inc., an internally developed heating, ventilation and air conditioning
("HVAC") installation and service business, which operates five locations in
the south, northeast and northwest regions of the United States.
ACQUISITION OF AGWAY ENERGY ASSETS
On November 10, 2003, we entered into an asset purchase agreement (the
"Purchase Agreement") to acquire substantially all of the assets and operations
of Agway Energy for $206.0 million in cash, subject to certain purchase price
adjustments. Agway Energy, based in Syracuse, New York, is a leading regional
marketer of propane, fuel oil, gasoline and diesel fuel primarily in New York,
Pennsylvania, New Jersey and Vermont. We believe, based on LP/Gas Magazine
dated February 2003, that Agway Energy is the eighth largest retail propane
marketer in the United States,
S-1
operating through approximately 139 distribution and sales centers. Agway
Energy is also one of the leading marketers and distributors of fuel oil in the
northeast region of the United States. To complement its core marketing and
delivery business, Agway Energy installs and services a wide variety of home
comfort equipment, particularly in the area of HVAC. Additionally, to a lesser
extent, Agway Energy markets natural gas and electricity in New York and
Pennsylvania. For its fiscal year ended June 30, 2003, Agway Energy served more
than 400,000 active customers across all of its lines of business and sold
approximately 106.3 million gallons of propane and approximately 356.8 million
gallons of fuel oil, gasoline and diesel fuel to retail customers for
residential, commercial and agricultural applications. For its fiscal year
ended June 30, 2003, Agway Energy generated revenues of $686.6 million, EBITDA
of $41.1 million and cash flow from operating activities of $19.1 million. See
"Agway Energy Selected Financial and Other Data" for our calculation of EBITDA,
as well as a reconciliation of EBITDA to cash provided by operating activities.
We believe the Acquisition is consistent with our business strategy of
prudently pursuing acquisitions of retail propane distributors and other
energy-related businesses that can complement or supplement our core propane
operations. The Acquisition is expected to provide many strategic benefits to
us, including:
o FURTHER STRENGTHENING OUR POSITION IN THE NORTHEAST ENERGY DISTRIBUTION
MARKET
Agway Energy is a well-known propane and fuel oil marketer in the
northeast energy market, with approximately 139 distribution and sales
centers and more than 400,000 active customers. The Acquisition will
significantly expand our presence in the northeast retail propane market.
Additionally, Agway Energy's extensive presence in the fuel oil delivery
business expands our product offerings in the attractive northeast energy
market. The Acquisition provides an opportunity to leverage our existing
management expertise and technology to enhance operational efficiencies
of our combined business.
o YIELDING LONG-TERM COST SAVINGS
The geography of Agway Energy's distribution and service centers overlaps
with Suburban's in the northeast market. In the short-term, we expect
synergies will come from integrating back office functions, office space
and certain field operations. Additionally, we expect to leverage our
existing supply relationships to achieve improved purchasing power for
the combined entity. Longer-term cost savings are expected to result from
utilizing Suburban's information systems, including our truck routing
technology, as well as implementing programs for improved asset
utilization.
o ENHANCING OUR EXISTING HVAC BUSINESS
Agway Energy's HVAC business is more mature than our Suburban @ Home
operations and is expected to provide an opportunity to accelerate the
growth of this business. In addition, the Acquisition gives us the
opportunity to acquire many skilled and experienced service people who
can enhance the overall service offering to our existing customer base.
Agway Energy is comprised of three wholly-owned subsidiaries of Agway,
Inc., which is presently a debtor-in-possession under Chapter 11 of the
Bankruptcy Code in a bankruptcy proceeding pending before the United States
Bankruptcy Court for the Northern District of New York (the "Bankruptcy
Court"). Agway Energy is not a Chapter 11 debtor. The Purchase Agreement was
filed with the Bankruptcy Court and is incorporated by reference into this
prospectus supplement and accompanying prospectus. On November 24, 2003, the
Bankruptcy Court approved Agway, Inc.'s motion to establish bid procedures for
the sale. Under the Bankruptcy Court order, we were officially designated the
"stalking horse," or lead bidder, in a process in which additional bids for the
Agway Energy assets and business operations are being solicited for a specified
period of time. An auction is currently scheduled for December 18, 2003. If we
are the successful bidder at the auction, the closing of the Acquisition is
expected to occur shortly following the conclusion of the auction process and
upon receipt of necessary regulatory approvals. There can be no assurance that
Suburban will
S-2
ultimately be the successful bidder at the auction or will be able to
consummate the Acquisition. We intend to finance the Acquisition through this
offering and a concurrent private placement of senior notes. This offering is
not contingent on the consummation of the Acquisition. In contrast, although we
expect the concurrent private placement of senior notes to close at the time we
close the Acquisition, we will not receive the proceeds from that offering if
the Acquisition does not close by a specified date. See "The Acquisition" and
"Description of Certain Indebtedness."
COMPETITIVE STRENGTHS
We believe we are well positioned to successfully execute our business
strategy due to the following competitive strengths:
STABLE CASH FLOW BUSINESS WITH STRONG FINANCIAL POSITION. The
non-discretionary nature of propane usage and our ability to typically pass
through commodity price changes to end-users enable us to generate stable cash
flows despite fluctuations in weather and commodity prices. To further enhance
the stability of our cash flows, we have focused on shifting more costs from
fixed to variable, particularly in the areas of compensation, employee benefits
and vehicle costs. Our stable cash flows, in combination with the proceeds of
equity offerings, have allowed us to reduce our total indebtedness by more than
$140.0 million since September of 2000 while maintaining strong cash
distribution coverage.
DIVERSITY OF GEOGRAPHY AND CUSTOMER BASE. Our geographic diversity makes
us less sensitive to extreme weather variations in any particular region. In
addition, we serve customers in several market segments which also helps to
smooth fluctuations in volume from year to year. Industrial and commercial
customers, which accounted for approximately 40% of our retail gallons sold in
fiscal year 2003, are generally less weather sensitive in their demand for
propane. On the other hand, our residential customers, which accounted for
approximately 41% of our retail gallons sold in fiscal year 2003, are typically
less sensitive to price and the general economic environment.
FAVORABLE OPERATING FOOTPRINT WITH HIGH PERCENTAGE OF RETAIL SALES. Our
operations are primarily located on the east and west coasts of the United
States which are characterized by a concentration of higher margin retail
customers. For the fiscal year ended September 27, 2003, sales to retail
customers represented approximately 94% of our propane gallons sold. High
customer density in these regions provides significant economies of scale and
allows us to maximize our operating efficiencies.
DEDICATION TO CUSTOMER SATISFACTION. We maintain an internal focus on
customer satisfaction through the implementation of marketing programs and
local-level accountability for customer retention. In addition, our
compensation plans are based, in part, on the results of a customer
satisfaction survey administered quarterly by an independent third party.
EXPERIENCED MANAGEMENT TEAM WHOSE INCENTIVES ARE DIRECTLY ALIGNED WITH
INVESTORS. Our management team includes a combination of executives with
significant industry experience, complemented by those that bring a broad based
business and financial aptitude. Additionally, because our general partner is
fully owned by management, management's incentives are directly aligned with our
investors. Incentive Distribution Rights of our general partner under our
partnership agreement are capped at 15%, compared to up to 50% for other master
limited partnerships, which enhances future cash distributions and growth for
our common unitholders.
OUR STRATEGY
Our business strategy is to deliver increasing value to our unitholders
through initiatives, both internal and external, that are geared toward
achieving sustainable profitable growth and increased quarterly distributions.
We pursue this business strategy through a combination of:
o an internal focus on enhancing customer service, growing and retaining
our customer base and improving the efficiency of operations; and
S-3
o acquisitions of businesses to complement or supplement our core propane
operations.
Over the past several years, we have focused on improving the efficiency
of our operations and our cost structure, strengthening our balance sheet and
distribution coverage and building a platform for growth. We continue to pursue
internal growth of our existing propane operations and to foster the growth of
related retail and service operations that can benefit from our infrastructure
and national presence. We invest in enhancements to our technology
infrastructure to increase operating efficiencies and to develop marketing
programs and incentive compensation arrangements focused on customer growth and
retention. We measure and reward the success of our customer service centers
based on a combination of profitability of the individual customer service
center, customer growth and satisfaction statistics and asset utilization
measures. Additionally, we continuously evaluate our existing facilities to
identify opportunities to optimize our return on assets by selectively
divesting operations in slower growing markets and seek to reinvest in markets
that present more opportunities for growth.
In addition to our internal growth strategies, we have evaluated several
acquisition opportunities both within the propane sector, as well as in other
energy-related businesses, in an effort to accelerate our overall growth
strategy. Our acquisition strategy is to focus on businesses with a relatively
steady cash flow that will either extend our presence in strategically
attractive propane markets, complement our existing network of propane
operations or provide an opportunity to diversify our operations with other
energy-related assets. In this regard, we believe that the Acquisition
significantly enhances our position in the northeast propane market and expands
our product and service offerings to further support our overall growth
objectives.
RECENT DEVELOPMENTS
On December 3, 2003, Suburban announced an intention to increase its
quarterly distribution from $0.5875 to $0.60 per common unit. On an annualized
basis, the increase would equate to $0.05 per common unit, from $2.35 to $2.40
per common unit. The first distribution at this increased level would be
payable in May 2004, with respect to the second fiscal quarter of 2004 at which
time, or prior to, the Acquisition is expected to have been completed. This
increase is contingent upon the consummation of the Acquisition and declaration
by the Board of Supervisors.
S-4
OUR ORGANIZATIONAL STRUCTURE
Our limited partners own a single class of limited partner interests,
which are represented by the common units. Our general partner, Suburban Energy
Services Group LLC, is owned by approximately 40 of our executives and key
employees. Our operations are conducted through an operating partnership and
its corporate subsidiaries. The following chart shows our organizational
structure:
-------------------------------
Management
(40 members)
-------------------------------
100%
------------------------------- -------------------------------
Common Unitholders Suburban Energy
(Limited Partners) Services Group LLC
(General Partner)
------------------------------- -------------------------------
99.30% limited 0.70%
partner interest general
partner
interest
----------------------------------
Suburban Propane Partners, L.P.
(Master Limited Partnership)
----------------------------------
1.0101%
general
98.9899% limited -------------------------------- partner
partner interest Suburban Energy Finance Corp.(1) interest
--------------------------------
-----------------------------
Suburban Propane, L.P.(2)
-----------------------------
-------------------------------- ------------------------
Suburban Sales and Service, Inc. Suburban Holdings, Inc.
-------------------------------- ------------------------
--------------------- --------------------------- -------------------------
Suburban @ Home, Inc. Suburban Franchising, Inc. Gas Connections, Inc.(2)
--------------------- --------------------------- -------------------------
(1) Suburban Energy Finance Corp. is expected to be a joint and several
obligor in connection with our private placement of senior notes. It has
only nominal assets and does not conduct any operations.
(2) Suburban Propane, L.P., our operating partnership, will hold Agway
Energy's propane related assets upon consummation of the Acquisition.
Agway Energy's non-propane related assets will be held in one or more
wholly-owned subsidiaries of Gas Connection, Inc. upon consummation of
the Acquisition.
WHERE YOU CAN FIND US
We maintain our executive offices at 240 Route 10 West, Whippany, New
Jersey 07981 and our telephone number at that address is 973-887-5300. Our
website is www.suburbanpropane.com. The information on our website is not a
part of, and is not incorporated by reference into, this prospectus supplement
or the accompanying prospectus.
S-5
THE OFFERING
Title......................... Common units representing limited partner
interests.
Securities Offered............ 2,600,000 common units, assuming the
underwriters' over-allotment option is not
exercised.
Units Outstanding after
the Offering.................. 29,866,767 common units, assuming the
underwriters' over-allotment option is not
exercised.
If the underwriters' over-allotment option is
exercised in full:
o 390,000 additional common units will be
issued; and
o 30,256,767 common units will be
outstanding.
Price......................... $30.90 for each common unit representing a
limited partner interest.
New York Stock Exchange
Trading Symbol............... SPH
Concurrent Offering........... Concurrently with this offering of common
units, we are offering in a private placement,
by means of a separate offering memorandum,
$150.0 million aggregate principal amount of
our senior notes due 2013. Neither this
offering of common units nor our concurrent
private placement of senior notes is contingent
upon the completion of the other. The private
placement of senior notes is, however,
contingent on the consummation of the
Acquisition.
Use of Proceeds............... We will receive approximately $75.9 million
from the sale of the common units, or $87.5
million if the underwriters' over-allotment
option is exercised in full, in each case,
after deducting the underwriting discount and
offering expenses. We also expect to receive
approximately $145.9 million from our
concurrent private placement of senior notes
due 2013, after deducting the underwriting
discount. We intend to use the net proceeds
from this offering and our concurrent private
placement of senior notes to fund the purchase
price for the Acquisition and related costs and
expenses, which we currently estimate to be
approximately $214.0 million in the aggregate,
and for general partnership purposes, which may
include working capital purposes, capital
expenditures and debt reduction. This offering
of common units is not contingent on the
consummation of the Acquisition, and if the
Acquisition does not close, we expect to use
the net proceeds from this offering for the
other purposes listed in the preceding
sentence, including the repayment of our next
annual principal installment of $42.5 million
due June 30, 2004 under our 7.54% senior notes
due 2011. In contrast, although we expect the
concurrent private
S-6
placement of senior notes to close at the time
we close the Acquisition, we will not receive
the proceeds from that offering if the
Acquisition does not close by a specified
date. See "Use of Proceeds."
RATIO OF TAXABLE INCOME TO DISTRIBUTIONS
We estimate that if you buy common units in this offering and own those
common units from the purchase date through December 31, 2007, you will be
allocated, on a cumulative basis, an amount of federal taxable income for that
period that will be not more than 20% of the cash distributed attributable to
that period. We further estimate that for taxable years ending after December
31, 2007, the taxable income allocable to the unitholders will be a much larger
percentage of cash distributed to unitholders. These estimates, and the
underlying assumptions, also are subject to, among other things, numerous
business, economic, regulatory, competitive and political uncertainties beyond
our control. Further, the estimates are based on current tax law and certain
tax reporting positions that we have adopted and with which the Internal
Revenue Service could disagree. Accordingly, we cannot assure you that the
estimates will prove to be correct. The actual percentage could be higher or
lower, and any differences could be significant and could materially affect the
market value of the common units.
S-7
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OTHER DATA
The following table displays our summary financial data for the periods
ended and as of the dates indicated. We derived the historical data for the
fiscal years ended September 29, 2001, September 28, 2002 and September 27,
2003 and as of those dates from our audited consolidated financial statements.
The summary unaudited pro forma statement of operations data give effect to the
Acquisition and the use of proceeds from this offering and the concurrent
private placement of senior notes due 2013 as if each of these transactions had
occurred at the beginning of the period. The summary unaudited pro forma
balance sheet data give effect to these transactions as if each of these
transactions had occurred on September 27, 2003. The summary pro forma
financial data are not intended to represent our financial position, results of
operations or cash flows had these transactions been completed as of such dates
or to project our financial position, results of operations or cash flows for
any future period or date. You should read the information set forth below
together with the other financial information contained in or incorporated by
reference in this prospectus supplement and the accompanying prospectus.
(Amounts in thousands, except per unit amounts)
YEAR ENDED
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PRO FORMA
SEPTEMBER 29, SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 27,
2001 2002 2003 2003(A)
--------------- --------------- --------------- --------------
STATEMENT OF OPERATIONS DATA
Revenues ............................................. $ 931,536 $ 665,105 $ 771,679 $ 1,458,304
Costs and expenses ................................... 838,055 582,321 691,662 1,343,497
Gain on sale of storage facility ..................... -- 6,768 -- --
Income before interest expense and provision for
income taxes(b) ..................................... 93,481 89,552 80,017 114,807
Interest expense, net ................................ 39,596 35,325 33,629 45,654
Provision for income taxes ........................... 375 703 202 4,202
Income from continuing operations(b) ................. 53,510 53,524 46,186 64,951
Discontinued operations:
Gain on sale of customer service centers(c) ......... -- -- 2,483 --
Net income(b) ........................................ 53,510 53,524 48,669 --
Income from continuing operations per common
unit--basic ......................................... 2.14 2.12 1.78 2.27
Net income per common unit--basic(d) ................. 2.14 2.12 1.87 --
Net income per common unit--diluted(d) ............... 2.14 2.12 1.86 --
Cash distributions declared per unit ................. $ 2.20 $ 2.28 $ 2.33 $ 2.33
BALANCE SHEET DATA (END OF PERIOD)
Cash and cash equivalents ............................ $ 36,494 $ 40,955 $ 15,765 $ 23,690
Current assets ....................................... 124,339 116,789 98,912 180,180
Total assets ......................................... 723,006 700,146 665,630 934,357
Current liabilities, excluding current portion of
long-term borrowings ................................ 119,196 98,606 94,802 133,071
Total debt ........................................... 473,177 472,769 383,826 533,826
Partners' capital--Common Unitholders ................ 105,549 103,680 165,950 241,875
Partners' capital--General Partner ................... $ 1,888 $ 1,924 $ 1,567 $ 1,567
STATEMENT OF CASH FLOWS DATA
Cash provided by/(used in)
Operating activities ................................ $ 101,838 $ 68,775 $ 57,300 $ 72,879
Investing activities ................................ (17,907) (6,851) (4,859) (235,809)
Financing activities ................................ $ (59,082) $ (57,463) $ (77,631) $ 142,115
OTHER DATA
Depreciation and amortization(e) ..................... $ 36,496 $ 28,355 $ 27,520 $ 36,120
EBITDA(f) ............................................ 129,977 117,907 110,020 150,927
Capital expenditures(g)
Maintenance and growth .............................. 23,218 17,464 14,050 24,201
Acquisitions ........................................ $ -- $ -- $ -- $ 214,000
Retail propane gallons sold .......................... 524,728 455,988 491,451 597,733
S-8
(a) The pro forma statement of operations data for the year ended September 27,
2003 combines our historical consolidated statement of operations for the
year ended September 27, 2003 and the historical combined statement of
operations of Agway Energy for its fiscal year ended June 30, 2003, giving
effect to the Acquisition and the completion of this offering and
concurrent private placement of senior notes as if they had occurred on
September 29, 2002 (the beginning of our 2003 fiscal year). The pro forma
balance sheet data as of September 27, 2003 combines our consolidated
balance sheet as of September 27, 2003 and the combined balance sheet of
Agway Energy as of June 30, 2003, giving effect to the Acquisition and the
completion of this offering and concurrent private placement of senior
notes as if they had occurred on September 27, 2003. See "Unaudited Pro
Forma Condensed Combined Financial Statements" for a more detailed
description of pro forma adjustments. In the event the Acquisition and the
private placement of senior notes do not take place, our partners' capital
and cash will increase by the amount of the net proceeds from this
offering.
(b) These amounts include, in addition to the gain on sale of storage facility,
gains from the disposal of property, plant and equipment of $3.8 million
for fiscal year 2001, $0.5 million for fiscal year 2002 and $0.6 million
for fiscal year 2003.
(c) Gain on sale of customer service centers consists of nine customer service
centers we sold during fiscal year 2003 for total cash proceeds of
approximately $7.2 million. We recorded a gain on sale of approximately
$2.5 million, which has been accounted for within discontinued operations
pursuant to Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." Prior
period results of operations attributable to these nine customer service
centers were not significant and, as such, prior period results have not
been reclassified to remove financial results from continuing operations.
(d) Basic net income per limited partner unit is computed by dividing net
income, after deducting our general partner's interest, by the weighted
average number of outstanding common units. Diluted net income per limited
partner unit is computed by dividing net income, after deducting the
general partner's approximate 2% interest, by the weighted average number
of outstanding common units and time vested restricted units granted under
our 2000 Restricted Unit Plan.
(e) Depreciation and amortization expense for the year ended September 28, 2002
reflects the early adoption of SFAS No. 142, "Goodwill and Other Intangible
Assets," as of September 30, 2001 (the beginning of our 2002 fiscal year).
SFAS 142 eliminated the requirement to amortize goodwill and certain
intangible assets. Amortization expense for the year ended September 28,
2002 reflects approximately $7.4 million lower amortization expense
compared to the year ended September 29, 2001 as a result of the
elimination of amortization expense associated with goodwill.
(f) EBITDA represents net income before deducting interest expense, income
taxes, depreciation and amortization. Our management uses EBITDA as a
measure of liquidity and we are including it because we believe that it
provides our investors and industry analysts with additional information to
evaluate our ability to meet our debt service obligations and to pay our
quarterly distributions to holders of our common units. Moreover, our
existing senior note agreements and our revolving credit agreement require
us to use EBITDA as a component in calculating our leverage and interest
coverage ratios. EBITDA is not a recognized term under generally accepted
accounting principles ("GAAP") and should not be considered as an
alternative to net income or cash flow provided by operating activities
determined in accordance with GAAP. Because EBITDA, as determined by us,
excludes some, but not all, items that affect net income, it may not be
comparable to EBITDA or similarly titled measures used by other companies.
The following table sets forth (i) our calculation of EBITDA and (ii) a
reconciliation of EBITDA, as so calculated, to our net cash provided by
operating activities (amounts in thousands):
YEAR ENDED
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PRO FORMA
SEPTEMBER 29, SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 27,
2001 2002 2003 2003
--------------- --------------- --------------- --------------
Net income (1) .................................... $ 53,510 $ 53,524 $ 48,669 $ 64,951
Add:
Provision for income taxes ....................... 375 703 202 4,202
Interest expense, net ............................ 39,596 35,325 33,629 45,654
Depreciation and amortization .................... 36,496 28,355 27,520 36,120
--------- --------- --------- ----------
EBITDA ............................................ 129,977 117,907 110,020 150,927
--------- --------- --------- ----------
Add (subtract):
Provision for income taxes ....................... (375) (703) (202) (4,202)
Interest expense, net ............................ (39,596) (35,325) (33,629) (45,654)
Gain on disposal of property, plant and
equipment, net .................................. (3,843) (546) (636) (636)
Gain on sale of customer service centers ......... -- -- (2,483) --
Gain on sale of storage facility ................. -- (6,768) -- --
Changes in working capital and other assets
and liabilities ................................. 15,675 (5,790) (15,770) (27,556)
--------- --------- --------- ----------
Net cash provided by operating activities ......... $ 101,838 $ 68,775 $ 57,300 $ 72,879
========= ========= ========= ==========
Net cash used in investing activities ............. $ (17,907) $ (6,851) $ (4,859) $ (235,809)
========= ========= ========= ==========
Net cash used in financing activities ............. $ (59,082) $ (57,463) $ (77,631) $ 142,115
========= ========= ========= ==========
(1) For purposes of the pro forma presentation, this amount represents
income from continuing operations pursuant to Regulation S-X.
(g) Our capital expenditures fall generally into three categories: (i)
maintenance expenditures, which include expenditures for repair and
replacement of property, plant and equipment; (ii) growth capital
expenditures, which include new propane tanks and other equipment to
facilitate expansion of our customer base and operating capacity; and (iii)
acquisition capital expenditures, which include expenditures related to the
acquisition of propane and other retail operations and a portion of the
purchase price allocated to intangibles associated with such acquired
businesses.
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RISK FACTORS
Before you invest in our common units, you should be aware that there are
various risks in doing so, including those described below. You should
carefully consider these risk factors, together with all the other information
included or incorporated by reference in this prospectus supplement and the
accompanying prospectus. If any of the events described in these risk factors
or elsewhere in this prospectus supplement or the accompanying prospectus
actually occur, then our business, results of operations or financial condition
could be materially adversely affected. In that event, we may be unable to make
distributions to our unitholders, the trading price of the common units may
decline and you may lose all or part of your investment.
RISKS INHERENT IN OUR BUSINESS
SINCE WEATHER CONDITIONS MAY ADVERSELY AFFECT DEMAND FOR PROPANE, OUR RESULTS
OF OPERATIONS AND FINANCIAL CONDITION ARE VULNERABLE TO WARM WINTERS
Weather conditions have a significant impact on the demand for propane for
both heating and agricultural purposes. Many of our customers rely heavily on
propane as a heating fuel. The volume of propane sold is at its highest during
the six-month peak heating season of October through March and is directly
affected by the severity of the winter. Typically, we sell approximately
two-thirds of our retail propane volume during the peak heating season.
Actual weather conditions can vary substantially from year to year,
significantly affecting our financial performance. For example, temperatures
nationwide averaged 1% colder than normal in fiscal year 2003 compared to 13%
warmer than normal temperatures in fiscal year 2002 and 2% colder than normal
in fiscal year 2001 as reported by the National Oceanic and Atmospheric
Administration (NOAA). Furthermore, variations in weather in one or more
regions in which we operate can significantly affect the total volume of
propane we sell and, consequently, our results of operations. Variations in the
weather in the northeast, where we have a greater concentration of higher
margin residential accounts, generally have a greater impact on our operations
than variations in the weather in other markets. Our ability to pay
distributions to unitholders, and principal and interest on our indebtedness,
depends on the cash generated by our operating partnership. The operating
partnership's financial performance is affected by weather conditions. As a
result, we cannot assure you that the weather conditions in any quarter or year
will not have a material adverse effect on our operations or that our available
cash will be sufficient to pay distributions to unitholders, and principal and
interest on our indebtedness.
THE RISK OF TERRORISM AND POLITICAL UNREST IN THE MIDDLE EAST MAY ADVERSELY
AFFECT THE ECONOMY AND THE PRICE AND AVAILABILITY OF PROPANE
Terrorist attacks, such as the attacks that occurred in New York,
Pennsylvania and Washington, D.C. on September 11, 2001, and political unrest
in the Middle East may adversely impact the price and availability of propane,
our results of operations, our ability to raise capital and our future growth.
The impact that the foregoing may have on our industry in general, and on us in
particular, is not known at this time. An act of terror could result in
disruptions of crude oil or natural gas supplies and markets, the sources of
propane, and our infrastructure facilities could be direct or indirect targets.
Terrorist activity may also hinder our ability to transport propane if our
means of supply transportation, such as rail or pipeline, become damaged as a
result of an attack. A lower level of economic activity could result in a
decline in energy consumption, which could adversely affect our revenues or
restrict our future growth. Instability in the financial markets as a result of
terrorism could also affect our ability to raise capital. Terrorist activity
could likely lead to increased volatility in prices for propane. We have opted
to purchase insurance coverage for terrorist activities within our property and
casualty insurance programs. This additional coverage has resulted in
additional insurance premiums.
SUDDEN PROPANE PRICE INCREASES DUE TO, AMONG OTHER THINGS, OUR INABILITY TO
OBTAIN ADEQUATE SUPPLIES OF PROPANE FROM OUR USUAL SUPPLIERS, MAY ADVERSELY
AFFECT OUR OPERATING RESULTS
Our profitability in the retail propane business is largely dependent on
the difference between our product cost and retail sales price. Propane is a
commodity, and the unit price we pay is subject to
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volatile changes in response to changes in supply or other market conditions
over which we have no control, including the severity of winter weather and the
price and availability of competing fuels such as natural gas and fuel oil. In
general, product supply contracts permit suppliers to charge posted prices at
the time of delivery or the current prices established at major supply points
such as Mont Belvieu, Texas, and Conway, Kansas. In addition, our propane
supply from our usual sources may be interrupted due to reasons that are beyond
our control. As a result, the cost of acquiring propane from other suppliers
might be materially higher at least on a short-term basis. Since we may not be
able to pass on to our customers immediately, or in full, all increases in our
wholesale cost of propane, these increases could reduce our profitability. We
engage in transactions to hedge product costs from time to time in an attempt
to reduce cost volatility and to help ensure the availability of propane during
periods of short supply. We cannot assure you that future volatility in propane
supply costs will not have a material adverse effect on our profitability and
cash flow or our available cash required to pay distributions to our
unitholders, and principal and interest on our indebtedness.
BECAUSE OF THE HIGHLY COMPETITIVE NATURE OF THE RETAIL PROPANE BUSINESS, WE MAY
NOT BE ABLE TO RETAIN EXISTING CUSTOMERS OR ACQUIRE NEW CUSTOMERS, WHICH COULD
HAVE AN ADVERSE IMPACT ON OUR OPERATING RESULTS AND FINANCIAL CONDITION
The retail propane industry is mature and highly competitive. We expect
overall demand for propane to remain relatively constant over the next several
years, with year-to-year industry volumes being affected primarily by weather
patterns and with competition intensifying during warmer than normal winters.
We compete with other distributors of propane, including a number of large
national and regional firms and several thousand small independent firms.
Propane also competes with other sources of energy, some of which are less
costly for equivalent energy value. For example:
o Electricity competes with propane.
o Natural gas is a significantly less expensive source of energy than
propane. As a result, except for some industrial and commercial
applications, propane is generally not economically competitive with
natural gas in areas where natural gas pipelines already exist. The
gradual expansion of the nation's natural gas distribution systems has
made natural gas available in many areas that previously depended upon
propane.
o Fuel oil competes with propane, but to a lesser extent than natural
gas.
o Other alternative energy sources may develop in the future.
As a result of the highly competitive nature of the retail propane
business, our growth within the industry depends on our ability to acquire
other retail distributors, open new customer service centers, add new customers
and retain existing customers. We believe our ability to compete effectively
depends on reliability of service, responsiveness to customers and our ability
to control expenses in order to maintain competitive prices.
WE MAY NOT SUCCESSFULLY IMPLEMENT OUR EXPANSION STRATEGY
Our expansion strategy includes internal growth of our existing propane
operations, including fostering the growth of related retail and service
operations, as well as external growth through the acquisition of businesses to
complement or supplement our core propane operations or to diversify into other
energy-related businesses. We may not be able to fully implement this strategy
or realize the anticipated results. Implementation of our expansion strategy
may also be hindered by factors that are beyond our control, such as operating
difficulties, increased operating costs, general economic conditions or
increased competition for acquisition opportunities. Any material failure to
implement this strategy could have an adverse effect on our business, financial
condition and results of operations.
IF WE DO NOT MAKE ACQUISITIONS ON ECONOMICALLY ACCEPTABLE TERMS, OUR FUTURE
GROWTH MAY BE LIMITED
The retail propane industry is mature, and we foresee only limited growth
in total retail demand for propane. Because of long-standing customer
relationships that are typical in our industry, the
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inconvenience of switching tanks and suppliers and propane's higher cost
relative to other energy sources, such as natural gas, it may be difficult for
us to acquire new retail customers except through acquisitions. As a result, we
expect our growth to depend in part upon our ability to acquire other retail
propane distributors or other energy-related businesses and to successfully
integrate them into our existing operations and to make cost saving changes.
The competition for acquisitions is intense and we cannot assure you that we
will be able to acquire other propane distributors or other energy-related
businesses on economically acceptable terms. In addition, our ability to incur
debt to finance acquisitions may be restricted by some of the covenants
contained in our debt agreements.
ENERGY EFFICIENCY, GENERAL ECONOMIC CONDITIONS AND TECHNOLOGY ADVANCES HAVE
AFFECTED AND MAY CONTINUE TO AFFECT DEMAND FOR PROPANE BY OUR RETAIL CUSTOMERS
The national trend toward increased conservation and technological
advances, including installation of improved insulation and the development of
more efficient furnaces and other heating devices, has adversely affected the
demand for propane by our retail customers which, in turn, has resulted in
lower sales volumes to our customers. In addition, recent economic conditions
may lead to additional conservation by retail customers to further reduce their
heating costs. Future technological advances in heating, conservation and
energy generation may adversely affect our financial condition and results of
operations.
OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION MAY BE ADVERSELY AFFECTED BY
GOVERNMENTAL REGULATION AND ASSOCIATED ENVIRONMENTAL AND HEALTH AND SAFETY
COSTS
The propane business is subject to a wide range of federal, state and
local laws and regulations related to environmental and health and safety
matters. We have implemented environmental and health and safety programs and
policies designed to avoid potential liability and costs. For example, we are
subject to regulations that cover the transportation of hazardous materials. We
conduct ongoing training programs to help ensure that our operations are in
compliance with these and other safety regulations. We maintain various permits
that are necessary to operate some of our facilities, some of which are
material to our operations. It is possible, however, that we will have
increased costs due to stricter pollution control requirements or liabilities
resulting from noncompliance with operating or other regulatory permits. New
environmental and health and safety regulations might adversely impact our
operations, storage and transportation of propane. It is possible that material
costs and liabilities will be incurred, including those relating to claims for
damages to property and persons.
WE ARE SUBJECT TO OPERATING HAZARDS THAT COULD ADVERSELY AFFECT OUR OPERATING
RESULTS TO THE EXTENT NOT COVERED BY INSURANCE
Our operations are subject to all operating hazards and risks normally
associated with handling, storing and delivering combustible liquids such as
propane. As a result, we have been, and are likely to continue to be, a
defendant in various legal proceedings arising in the ordinary course of
business. We are self-insured for general, product, workers' compensation and
automobile liabilities up to predetermined amounts above which third party
insurance applies. We cannot guarantee that our insurance will be adequate to
protect us from all material expenses related to potential future claims for
personal injury and property damage or that these levels of insurance will be
available at economical prices.
WE ARE SUBJECT TO LITIGATION THAT IS NOT COVERED BY INSURANCE AND COULD
ADVERSELY AFFECT OUR OPERATING RESULTS
We are from time to time subject to litigation that is not covered by our
existing insurance policies. At present, our operating partnership is a
defendant in an action brought by Heritage Propane Partners, L.P., which is
more fully described in this prospectus supplement under the caption
"Business--Legal Proceedings." We do not anticipate that this matter will be
tried before the Spring of 2004. We believe that the claims and proposed
additional claims brought against our
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operating partnership are without merit and we are defending the action
vigorously. However, we cannot predict the outcome of this or any other trial
or, if the trial is before a jury, what verdict the jury ultimately may reach.
As a consequence, this action, if adversely determined, could result in
liability that is material to us.
RISKS RELATING TO THE ACQUISITION
IF WE ARE UNSUCCESSFUL IN CONSUMMATING THIS ACQUISITION, WE WILL NOT RECEIVE
THE BENEFITS OF THE AGWAY ENERGY ASSETS AND OPERATIONS
Our agreement to acquire substantially all of the assets and operations of
Agway Energy is subject to Bankruptcy Court approval, anti-trust review and a
number of other contractual conditions. In addition, a third-party may outbid
us in the auction process. If the Acquisition does not occur, we will not
realize the revenues, net income, anticipated cost savings and other synergies
of the Acquisition. In the event that we do not consummate the purchase of the
assets of Agway Energy, we intend to use the net proceeds of this offering as
set forth under "Use of Proceeds."
WE MAY NOT BE ABLE TO EFFECTIVELY INTEGRATE THE AGWAY ENERGY BUSINESS INTO OUR
OPERATIONS
We may be unable to realize, or to do so within any particular timeframe,
the anticipated benefits, including cost savings and other synergies, from the
Acquisition. The Acquisition may not produce the revenues, earnings or business
synergies that we anticipate, and the acquired business may not perform as
expected for a variety of reasons, including:
o difficulties in the integration of the operations, information systems
and personnel;
o potential loss of customers and key employees; and
o unanticipated costs to integrate the assets and operations.
In addition, management's attention and resources may be diverted during
the integration. Any one or a combination of these factors may cause our
revenues or earnings to be negatively impacted.
SOME OF AGWAY ENERGY'S OPERATIONS, PROPERTIES AND ASSETS ARE SUBJECT TO
EXTENSIVE ENVIRONMENTAL LAWS AND REGULATIONS
Agway Energy's operations, properties and assets, including fuel oil tanks
and gas stations, are subject to extensive federal, state and local
environmental laws and regulations including those concerning, among other
things, the investigation and remediation of contaminated soil and groundwater,
transportation of hazardous materials, and other matters relating to the
protection of the environment and various health and safety matters. These
requirements are complex, changing and tend to become more stringent over time.
There can be no assurance that Agway Energy has been or will be at all times in
complete compliance with all such requirements or that we will not incur
material costs or liabilities in the future relating to such requirements.
Violations could result in penalties, or the curtailment or cessation of
operations. To date, we believe Agway Energy has not incurred significant costs
in connection with compliance or remedial obligations required under
environmental laws and regulations.
In connection with the Acquisition, contamination or potential
contamination was identified at a number of Agway Energy properties and will be
investigated and remediated by us as required. Under the Purchase Agreement,
Agway, Inc. has set aside $15.0 million from the total purchase price in a
separate escrow account to fund certain future environmental remediation costs
and expenses. We cannot predict whether this sum will be sufficient to address
the known and unknown contamination at the Agway Energy properties. Moreover,
currently unknown environmental issues, such as the discovery of additional
contamination, may result in significant additional expenditures, and
potentially significant expenditures also could be required to comply with
future changes to environmental laws and regulations or the interpretation or
enforcement thereof. Such expenditures, if required, could have a material
adverse effect on our business, financial condition or results of operations.
See "The Acquisition."
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RISKS INHERENT IN AN EQUITY INVESTMENT IN SUBURBAN
CASH DISTRIBUTIONS ARE NOT GUARANTEED AND MAY FLUCTUATE WITH OUR PERFORMANCE
AND OTHER EXTERNAL FACTORS
Because distributions on the common units are dependent on the amount of
cash generated, distributions may fluctuate based on our performance. The
actual amount of cash that is available will depend upon numerous factors,
including:
o winter weather conditions;
o cash flow generated by operations;
o required principal and interest payments on our debt;
o the costs of acquisitions;
o restrictions contained in our debt instruments;
o issuances of debt and equity securities;
o fluctuations in working capital;
o capital expenditures;
o prevailing economic conditions; and
o financial, business and other factors, a number of which will be
beyond our control.
Cash distributions are dependent primarily on cash flow and cash reserves,
and not on profitability, which is affected by non-cash items. Therefore, cash
distributions might be made during periods when we record losses and might not
be made during periods when we record profits.
Our partnership agreement gives our Board of Supervisors broad discretion
in establishing cash reserves for, among other things, the proper conduct of
our business. These cash reserves will also affect the amount of cash available
for distributions.
WE ARE A HIGHLY LEVERAGED COMPANY, AND OUR DEBT AGREEMENTS MAY LIMIT OUR
ABILITY TO MAKE DISTRIBUTIONS TO UNITHOLDERS AND OUR FINANCIAL FLEXIBILITY
As of September 27, 2003, we had total outstanding indebtedness of $383.8
million, including $382.5 million of existing senior notes with no outstanding
borrowings under our bank credit facility. Our EBITDA for the fiscal year ended
September 27, 2003 was $110.0 million, resulting in a ratio of debt to EBITDA
of 3.5 to 1.0. As a result, we have indebtedness that is substantial in
relation to our partners' capital. The senior notes and our bank credit
agreement contain restrictive covenants that limit our ability to incur
additional debt and to engage in specified transactions. The covenants specify
that we must retain a debt to EBITDA ratio of less than 5.0 to 1.0 or we will
be in default. We will not be able to make any distributions to our unitholders
if there is or will be an event of default under our debt agreements. The
amount and terms of our debt may adversely affect our ability to finance future
operations and capital needs, limit our ability to pursue acquisitions and
other business opportunities and make our results of operations more
susceptible to adverse economic conditions. In addition to our concurrent
private placement of senior notes due 2013, we may in the future incur
additional debt to finance acquisitions or for general business purposes, which
could result in a significant increase in our leverage. The payment of
principal and interest on our debt will reduce the cash available to make
distributions on the common units. Our ability to make principal and interest
payments depends on our future performance, which is subject to many factors,
some of which are beyond our control.
IF WE ISSUE ADDITIONAL LIMITED PARTNER INTERESTS OR OTHER EQUITY SECURITIES AS
CONSIDERATION FOR ACQUISITIONS OR FOR OTHER PURPOSES, YOUR RELATIVE VOTING
STRENGTH WILL BE DIMINISHED OVER TIME DUE TO THE DILUTION OF YOUR INTERESTS AND
ADDITIONAL TAXABLE INCOME MAY BE ALLOCATED TO YOU
Our partnership agreement generally allows us to issue additional limited
partner interests and other equity securities without the approval of the
unitholders. Our general partner, Suburban Energy
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Services Group LLC, has the right to purchase common units or other equity
securities whenever, and on the same terms that, we issue securities or rights
to persons other than the general partner and its affiliates, to the extent
necessary to maintain the percentage interest of the general partner and its
affiliates that existed immediately prior to each issuance. Other holders of
common units do not have similar rights. This, in turn, would result in
additional dilution to you. Therefore, when we issue additional common units or
securities ranking on a parity with the common units, your proportionate
partnership interest will decrease, and the amount of cash distributed on each
common unit and the market price of common units could decrease. The issuance
of additional common units will also diminish the relative voting strength of
each previously outstanding unit. In addition, the issuance of additional
common units, including those sold in this offering, will, over time, result in
the allocation of additional taxable income, representing built-in gain at the
time of the new issuance, to those unitholders that existed prior to the new
issuance.
RISKS ARISING FROM OUR PARTNERSHIP STRUCTURE
AND RELATIONSHIPS WITH OUR GENERAL PARTNER
UNITHOLDERS HAVE LIMITED VOTING RIGHTS
A Board of Supervisors manages our operations. Holders of common units
have only limited voting rights on matters affecting our business. One of these
limitations on voting rights allows holders of common units to elect only three
of the five members of our Board of Supervisors, and elections are only held
every three years. The most recent election was held on April 23, 2003.
The other two members of the Board of Supervisors are appointed by our
general partner. Common unitholders have no right to elect our general partner,
and the general partner cannot be removed except upon, among other things, the
vote of the holders of at least a majority of the then outstanding common units
and the approval of a successor general partner by the holders of at least a
majority of the then outstanding common units.
PERSONS OWNING 20% OR MORE OF THE COMMON UNITS CANNOT VOTE UNITS REPRESENTING
MORE THAN 20%
If, at any time, any person or group beneficially owns more than 20% of
the total common units outstanding, any common units owned by that person or
group in excess of 20% may not be voted on any matter. This provision may:
o discourage a person or group from attempting to remove the general
partner or otherwise changing management;
o discourage a person or group from attempting to acquire us; and
o reduce the price at which the common units will trade under some
circumstances.
UNITHOLDERS MAY BE REQUIRED TO SELL THEIR UNITS TO THE GENERAL PARTNER AT AN
UNDESIRABLE TIME OR PRICE
If at any time less than 20% of the outstanding units of any class are
held by persons other than the general partner and its affiliates, the general
partner will have the right to acquire all, but not less than all, of those
units at a price no less than their then current market price. As a
consequence, a unitholder may be required to sell his common units at an
undesirable time or price. The general partner may assign this purchase right
to any of its affiliates or to Suburban.
UNITHOLDERS MAY NOT HAVE LIMITED LIABILITY IN SOME CIRCUMSTANCES
A number of states have not clearly established limitations on the
liabilities of limited partners for the obligations of a limited partnership.
The unitholders might be held liable for our obligations as if they were
general partners if:
o a court or government agency determined that we were conducting
business in the state but had not complied with the state's limited
partnership statute; or
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o unitholders' rights to act together to remove or replace the general
partner or take other actions under the partnership agreement
constitute "participation in the control" of our business for purposes
of the state's limited partnership statute.
UNITHOLDERS MAY HAVE LIABILITY TO REPAY DISTRIBUTIONS
Unitholders will not be liable for assessments in addition to their
initial capital investment in the common units. Under specific circumstances,
however, unitholders may have to repay to us amounts wrongfully returned or
distributed to them. Under Delaware law, we may not make a distribution to
unitholders if the distribution causes our liabilities to exceed the fair value
of our assets. Liabilities to partners on account of their partnership
interests and nonrecourse liabilities are not counted for purposes of
determining whether a distribution is permitted. Delaware law provides that a
limited partner who receives a distribution of this kind and knew at the time
of the distribution that the distribution violated Delaware law will be liable
to the limited partnership for the distribution amount for three years from the
distribution date. Under Delaware law, an assignee who becomes a substituted
limited partner of a limited partnership is liable for the obligations of the
assignor to make contributions to the partnership. However, such an assignee is
not obligated for liabilities unknown to him at the time he or she became a
limited partner if the liabilities could not be determined from the partnership
agreement.
TAX RISKS
For a general discussion of the expected federal income tax consequences
of owning and disposing of common units, see "Tax Considerations."
TAX TREATMENT IS DEPENDENT ON PARTNERSHIP STATUS
The availability to a common unitholder of the federal income tax benefits
of an investment in the common units depends, in large part, on our
classification as a partnership for federal income tax purposes. Based on
certain representations of our general partner and us, Cahill Gordon & Reindel
LLP, our tax counsel, is of the opinion that, under current law, we will be
classified as a partnership for federal income tax purposes. However, no ruling
from the IRS as to this status has been or is expected to be requested.
Instead, we are relying on the opinion of our tax counsel, which is not binding
on the IRS.
If, contrary to the opinion of our tax counsel, we were classified as an
association taxable as a corporation for federal income tax purposes, we would
be required to pay tax on our income at corporate tax rates (currently a 35%
federal rate). Distributions to the common unitholders would generally be taxed
a second time as corporate distributions, and no income, gains, losses or
deductions would flow through to the unitholders. Because a tax would be
imposed upon us as an entity, the cash available for distribution to the common
unitholders would be substantially reduced. Treatment of us as a taxable entity
would cause a material reduction in the anticipated cash flow and after-tax
return to the common unitholders, likely causing a substantial reduction in the
value of the common units.
A change in law could cause us to be treated as an association taxable as
a corporation for federal income tax purposes or otherwise to be subject to
entity-level taxation. Our partnership agreement provides that if a law is
enacted or existing law is modified or interpreted in a manner that subjects us
to taxation as a corporation or otherwise subjects us to entity-level taxation
for federal, state or local income tax purposes, certain provisions of our
partnership agreement will be subject to change. These changes would include a
decrease in the minimum quarterly distribution and the target distribution
levels to reflect the impact of this law on us.
WE HAVE NOT REQUESTED AN IRS RULING REGARDING OUR CLASSIFICATION AS A
PARTNERSHIP
We have not requested a ruling from the IRS with respect to our
classification as a partnership for federal income tax purposes, whether our
propane operations generate "qualifying income" under Section 7704 of the
Internal Revenue Code or any other matter affecting us. Accordingly, the IRS
may adopt positions that differ from the conclusions of our tax counsel
expressed in this prospectus
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supplement or the positions taken by us. It may be necessary to resort to
administrative or court proceedings in an effort to sustain some or all of our
tax counsel's conclusions or the positions taken by us. A court may not concur
with some or all of our conclusions. Any contest with the IRS may materially
and adversely impact the market for the common units and the prices at which
they trade. In addition, the costs of any contest with the IRS will be borne
directly by us and indirectly by the unitholders and the general partner,
because the costs incurred by us will reduce the amount of cash available for
distribution on our common units.
A UNITHOLDER'S TAX LIABILITY COULD EXCEED CASH DISTRIBUTIONS ON ITS UNITS
A unitholder will be required to pay federal income taxes and, in some
cases, state and local income taxes on its allocable share of our income, even
if it receives no cash distributions from us. We cannot guarantee that a
unitholder will receive cash distributions equal to its allocable share of our
taxable income or even the tax liability to it resulting from that income.
OWNERSHIP OF COMMON UNITS MAY HAVE ADVERSE TAX CONSEQUENCES FOR TAX-EXEMPT
ORGANIZATIONS AND CERTAIN OTHER INVESTORS
Investment in common units by certain tax-exempt entities, regulated
investment companies and foreign persons raises issues specific to them. For
example, virtually all of our taxable income allocated to organizations exempt
from federal income tax, including individual retirement accounts and other
retirement plans, will be unrelated business taxable income and thus will be
taxable to the unitholder. Very little of our income will be qualifying income
to a regulated investment company. Distributions to foreign persons will be
reduced by withholding taxes at the current rate of 35%.
THERE ARE LIMITS ON THE DEDUCTIBILITY OF LOSSES
In the case of taxpayers subject to the passive loss rules (generally,
individuals and closely held corporations), any losses generated by us will
only be available to offset our future income and cannot be used to offset
income from other activities, including other passive activities or
investments. Unused losses may be deducted when the unitholder disposes of its
entire investment in us in a fully taxable transaction with an unrelated party.
A unitholder's share of our net passive income may be offset by unused losses
from us carried over from prior years, but not by losses from other passive
activities, including losses from other publicly traded partnerships.
TAX SHELTER REGISTRATION COULD INCREASE RISK OF POTENTIAL AUDIT BY THE IRS
We are registered with the IRS as a "tax shelter." The IRS has issued us
the following tax shelter registration number: 96080000050. Issuance of the
registration number does not indicate that an investment in us or the claimed
tax benefits have been reviewed, examined or approved by the IRS. We could be
audited by the IRS and tax adjustments could be made as a result of an audit.
The rights of a unitholder owning less than a 1% profits interest in us to
participate in the income tax audit process are very limited. Further, any
adjustments in our tax returns will lead to adjustments in the unitholders' tax
returns and may lead to audits of unitholders' tax returns and adjustments of
items unrelated to us. Each unitholder would bear the cost of any expenses
incurred for an examination of its personal tax return. To avoid penalties,
each time you sell any common units you must provide the transferee with our
tax shelter registration number and a written statement containing certain
other information.
TAX GAIN OR LOSS ON DISPOSITION OF COMMON UNITS COULD BE DIFFERENT THAN
EXPECTED
A unitholder who sells common units will recognize gain or loss equal to
the difference between the amount realized, including its share of our
nonrecourse liabilities, and its adjusted tax basis in the common units.
Currently, we do not have any nonrecourse liabilities to allocate to our
unitholders and we do not expect to have any in the future. Prior distributions
in excess of cumulative net taxable income allocated to a common unit which
decreased a unitholder's tax basis in that common unit will, in effect, become
taxable income if the common unit is sold at a price greater than the
unitholder's tax basis in that common unit, even if the price is less than the
original cost of the common unit. A
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portion of the amount realized, if the amount realized exceeds the unitholder's
adjusted basis in that common unit, will likely be characterized as ordinary
income for federal tax purposes under the depreciation recapture provisions of
Section 1245 of the Internal Revenue Code. Furthermore, should the IRS
successfully contest some conventions used by us, a unitholder could recognize
more gain on the sale of common units than would be the case under those
conventions, without the benefit of decreased income in prior years.
REPORTING OF PARTNERSHIP TAX INFORMATION IS COMPLICATED AND SUBJECT TO AUDITS
We will furnish each unitholder with a Schedule K-1 that sets forth its
allocable share of income, gains, losses and deductions. In preparing these
schedules, we will use various accounting and reporting conventions and adopt
various depreciation and amortization methods. We cannot guarantee that these
conventions will yield a result that conforms to statutory or regulatory
requirements or to administrative pronouncements of the IRS. Further, our tax
return may be audited, which could result in an audit of a unitholder's
individual tax return and increased liabilities for taxes because of
adjustments resulting from the audit.
THERE CAN BE NO ASSURANCE REGARDING THE UNIFORMITY OF COMMON UNITS AND
NONCONFORMING DEPRECIATION CONVENTIONS
Because we cannot match transferors and transferees of common units,
uniformity of the economic and tax characteristics of the common units to a
purchaser of common units of the same class must be maintained. To maintain
uniformity and for other reasons, we have adopted certain depreciation and
amortization conventions which may be inconsistent with Treasury Regulations
under Section 743(b) of the Internal Revenue Code. A successful challenge to
those conventions by the IRS could affect the fungibility of our common units
from a securities law standpoint, which could have a significant negative
impact on the marketability and value of the common units and the U.S. federal
income tax consequences associated with the common units.
THERE ARE STATE, LOCAL AND OTHER TAX CONSIDERATIONS
In addition to United States federal income taxes, unitholders will likely
be subject to other taxes, such as state and local taxes, unincorporated
business taxes and estate, inheritance or intangible taxes that are imposed by
the various jurisdictions in which the unitholder resides or in which we do
business or own property. A unitholder will likely be required to file state
and local income tax returns and pay state and local income taxes in some or
all of the various jurisdictions in which we do business or own property and
may be subject to penalties for failure to comply with those requirements. It
is the responsibility of each unitholder to file all United States federal,
state and local tax returns that may be required of him. Our tax counsel has
not rendered an opinion on the tax consequences of an investment in us other
than the United States federal income tax consequences.
UNITHOLDERS MAY HAVE NEGATIVE TAX CONSEQUENCES IF WE DEFAULT ON OUR DEBT OR
SELL ASSETS
If we default on any of our debt, the lenders will have the right to sue
us for non-payment. This could cause an investment loss and negative tax
consequences for unitholders through the realization of taxable income by
unitholders without a corresponding cash distribution. Likewise, if we were to
dispose of assets and realize a taxable gain while there is substantial debt
outstanding and proceeds of the sale were applied to the debt, unitholders
could have increased taxable income without a corresponding cash distribution.
CHANGES IN FEDERAL INCOME TAX LAW COULD AFFECT THE VALUE OF OUR COMMON UNITS
Recently enacted legislation has reduced the rate of federal income tax
applicable to qualified dividend income of individuals. Qualified dividend
income includes dividends received from domestic corporations and certain
foreign corporations. This legislation will not affect our ability to make
quarterly distributions, but may affect the attractiveness of an investment in
our common units. We cannot predict the effect on the value of our common units
this legislation might have, if at all.
S-18
USE OF PROCEEDS
We will receive approximately $75.9 million from the sale of the 2,600,000
common units that we are offering, or approximately $87.5 million if the
underwriters' over-allotment option is exercised in full, in each case after
deducting the underwriting discount and offering expenses. We expect to receive
approximately $145.9 million from our concurrent private placement of senior
notes due 2013, after deducting the underwriting discount. We intend to use the
net proceeds from this offering and our concurrent private placement of senior
notes to fund the purchase price for the Acquisition and related costs and
expenses, which we currently estimate to be approximately $214.0 million in the
aggregate, and for general partnership purposes, which may include working
capital purposes, capital expenditures and debt reduction. This offering of
common units is not contingent on the consummation of the Acquisition, and if
the Acquisition does not close, we expect to use the net proceeds from this
offering for the other purposes listed in the preceding sentence, and
principally for debt reduction, including the repayment of our next annual
principal installment of $42.5 million due June 30, 2004 under our 7.54% senior
notes due 2011. In contrast, although we expect the concurrent private
placement of senior notes to close at the time we close the Acquisition, we
will not receive the proceeds from that offering if the Acquisition does not
close by a specified date.
S-19
PRICE RANGE OF COMMON UNITS AND CASH DISTRIBUTIONS
As of December 1, 2003, there were 27,266,767 common units outstanding,
held by approximately 982 holders, including 26,638,181 common units held in
street name. The common units are listed and traded on the NYSE under the
symbol "SPH." The following table presents, for the periods indicated, the high
and low sales prices per common unit, as reported on the NYSE Composite Tape,
and the amount of quarterly cash distributions declared and paid per common
unit with respect to each quarter. The last reported sale price of our common
units on the New York Stock Exchange on December 10, 2003, was $30.90 per
common unit.
PRICE RANGE
------------------------- CASH
HIGH LOW DISTRIBUTION
----------- ----------- -------------
FISCAL 1999
First Quarter ended December 26, 1998 ........... $ 19.94 $ 17.13 $ 0.5000
Second Quarter ended March 27, 1999 ............. $ 20.13 $ 18.00 $ 0.5000
Third Quarter ended June 26, 1999 ............... $ 20.50 $ 17.94 $ 0.5125
Fourth Quarter ended September 25, 1999 ......... $ 20.75 $ 19.00 $ 0.5125
FISCAL 2000
First Quarter ended December 25, 1999 ........... $ 20.63 $ 16.50 $ 0.5250
Second Quarter ended March 25, 2000 ............. $ 20.00 $ 16.44 $ 0.5250
Third Quarter ended June 24, 2000 ............... $ 20.13 $ 18.38 $ 0.5250
Fourth Quarter ended September 30, 2000 ......... $ 22.06 $ 19.56 $ 0.5375
FISCAL 2001
First Quarter ended December 30, 2000 ........... $ 22.06 $ 19.00 $ 0.5375
Second Quarter ended March 31, 2001 ............. $ 24.25 $ 21.75 $ 0.5500
Third Quarter ended June 30, 2001 ............... $ 27.85 $ 23.40 $ 0.5500
Fourth Quarter ended September 29, 2001 ......... $ 28.00 $ 21.05 $ 0.5625
FISCAL 2002
First Quarter ended December 29, 2001 ........... $ 27.99 $ 24.50 $ 0.5625
Second Quarter ended March 30, 2002 ............. $ 28.40 $ 24.36 $ 0.5625
Third Quarter ended June 29, 2002 ............... $ 28.25 $ 25.59 $ 0.5750
Fourth Quarter ended September 28, 2002 ......... $ 28.49 $ 20.00 $ 0.5750
FISCAL 2003
First Quarter ended December 28, 2002 ........... $ 28.49 $ 24.60 $ 0.5750
Second Quarter ended March 29, 2003 ............. $ 29.60 $ 26.90 $ 0.5750
Third Quarter ended June 28, 2003 ............... $ 29.89 $ 27.40 $ 0.5875
Fourth Quarter ended September 27, 2003 ......... $ 30.95 $ 27.91 $ 0.5875
FISCAL 2004
First Quarter ending December 27, 2003
(through December 10, 2003) ................... $ 32.49 $ 28.75 $ (a)
(a) The cash distribution for this quarter has not yet been declared or paid.
S-20
CAPITALIZATION
The following presents our capitalization as of September 27, 2003 on a
historical basis and on an as adjusted basis to give pro forma effect to (i)
this offering as if it had occurred on September 27, 2003, and (ii) this
offering, our concurrent private placement of senior notes due 2013 and the
Acquisition as if each of them had occurred on September 27, 2003. The
following table assumes no exercise of the underwriters' over-allotment option
in connection with this offering of common units. Neither this offering of
common units nor the concurrent private placement of senior notes is contingent
upon the completion of the other. This offering of common units is not
contingent on the consummation of the Acquisition. In contrast, although we
expect the concurrent private placement of senior notes to close at the time we
close the Acquisition, we will not receive the proceeds from that offering if
the Acquisition does not close by a specified date.
SEPTEMBER 27, 2003
-----------------------------------------------------
AS FURTHER ADJUSTED
AS ADJUSTED FOR OUR NEW SENIOR
FOR THIS NOTES AND THE
HISTORICAL OFFERING ACQUISITION
------------ --------------- --------------------
(IN THOUSANDS)
Cash ............................................ $ 15,765 $ 91,690 $ 23,690
========= ========= =========
Liabilities:
Revolving credit facility(a) ................. -- -- --
Existing 7.54% senior notes due 2011 ......... 340,000 340,000 340,000
Existing 7.37% senior notes due 2012 ......... 42,500 42,500 42,500
Note payable and other debt .................. 1,326 1,326 1,326
New senior notes due 2013 in the concurrent
private placement ........................... -- -- 150,000
--------- --------- ---------
Total debt ..................................... 383,826 383,826 533,826
Less current portion ........................... 42,911 42,911 42,911
--------- --------- ---------
Total long-term debt ........................... 340,915 340,915 490,915
Partners' Capital:
Common unitholders ............................. 165,950 241,875 241,875
General partner ................................ 1,567 1,567 1,567
Deferred compensation .......................... (5,795) (5,795) (5,795)
Common units held in trust, at cost ............ 5,795 5,795 5,795
Unearned compensation .......................... (2,171) (2,171) (2,171)
Accumulated other comprehensive (loss) ......... (81,268) (81,268) (81,268)
--------- --------- ---------
Total partners' capital ........................ 84,078 160,003 160,003
--------- --------- ---------
Total capitalization ......................... $ 467,904 $ 543,829 $ 693,829
========= ========= =========
(a) Our revolving credit facility, which matures on May 31, 2006, provides for
a $75.0 million working capital facility and a $25.0 million acquisition
facility. As of December 10, 2003, we had approximately $23.3 million
outstanding under the revolving credit facility, including $10.5 million
under the acquisition facility and $12.8 million under the working capital
facility.
S-21
SUBURBAN SELECTED FINANCIAL AND OTHER DATA
The following financial data of Suburban, insofar as it relates to each of
the fiscal years 1999 through 2003, has been derived from audited consolidated
financial statements, including the consolidated balance sheets at September
27, 2003 and September 28, 2002 and the related consolidated statements of
operations and of cash flows for the years ended September 27, 2003, September
28, 2002 and September 29, 2001 and the notes thereto incorporated by reference
in this prospectus supplement.
(Amounts in thousands, except per unit amounts)
YEAR ENDED (A)
------------------------------------------------------------------------------
SEPTEMBER 25, SEPTEMBER 30, SEPTEMBER 29, SEPTEMBER 28, SEPTEMBER 27,
1999 2000(B) 2001 2002 2003
--------------- --------------- --------------- --------------- --------------
STATEMENT OF OPERATIONS DATA
Revenues ......................................... $ 620,207 $ 841,304 $ 931,536 $ 665,105 $ 771,679
Costs and expenses ............................... 547,579 770,332 838,055 582,321 691,662
Recapitalization costs(c) ........................ 18,903 -- -- -- --
Gain on sale of assets ........................... -- 10,328 -- -- --
Gain on sale of storage facility ................. -- -- -- 6,768 --
Income before interest expense and
provision for income taxes(d) ................... 53,725 81,300 93,481 89,552 80,017
Interest expense, net ............................ 31,218 42,534 39,596 35,325 33,629
Provision for income taxes ....................... 68 234 375 703 202
Income from continuing operations(d) ............. 22,439 38,532 53,510 53,524 46,186
Discontinued operations:
Gain on sale of customer service
centers(e) .................................... -- -- -- -- 2,483
Net income(d) .................................... 22,439 38,532 53,510 53,524 48,669
Income from continuing operations per
common unit--basic .............................. 0.83 1.70 2.14 2.12 1.78
Net income per common unit--basic(f) ............. 0.83 1.70 2.14 2.12 1.87
Net income per common unit--diluted(f) ........... 0.83 1.70 2.14 2.12 1.86
Cash distributions declared per unit ............. $ 2.03 $ 2.11 $ 2.20 $ 2.28 $ 2.33
BALANCE SHEET DATA (END OF PERIOD)
Cash and cash equivalents ........................ $ 8,392 $ 11,645 $ 36,494 $ 40,955 $ 15,765
Current assets ................................... 78,637 122,160 124,339 116,789 98,912
Total assets ..................................... 659,220 771,116 723,006 700,146 665,630
Current liabilities, excluding current portion
of long-term borrowings ......................... 99,953 124,585 119,196 98,606 94,802
Total debt ....................................... 430,687 524,095 473,177 472,769 383,826
Other long-term liabilities ...................... 60,194 60,607 71,684 109,485 102,924
Partners' capital--Common Unitholders ............ 66,342 58,474 105,549 103,680 165,950
Partners' capital--General Partner ............... $ 2,044 $ 1,866 $ 1,888 $ 1,924 $ 1,567
STATEMENT OF CASH FLOWS DATA
Cash provided by/(used in):
Operating activities ............................ $ 81,758 $ 59,467 $ 101,838 $ 68,775 $ 57,300
Investing activities ............................ (12,241) (99,067) (17,907) (6,851) (4,859)
Financing activities ............................ $ (120,944) $ 42,853 $ (59,082) (57,463) $ (77,631)
OTHER DATA
Depreciation and amortization(g) ................. $ 34,453 $ 37,032 $ 36,496 $ 28,355 $ 27,520
EBITDA(h) ........................................ 88,178 118,332 129,977 117,907 110,020
Capital expenditures(i):
Maintenance and growth .......................... 11,033 21,250 23,218 17,464 14,050
Acquisitions .................................... $ 4,768 $ 98,012 $ -- $ -- $ --
Retail propane gallons sold ...................... 524,276 523,975 524,728 455,988 491,451
S-22
(a) Our 2000 fiscal year contained 53 weeks. All other fiscal years contained
52 weeks.
(b) Includes the results from the November 1999 acquisition of certain
subsidiaries of SCANA Corporation, accounted for under the purchase method,
from the date of acquisition.
(c) We incurred expenses of $18.9 million in connection with the
recapitalization transaction described in Note 1 to the consolidated
financial statements included in our Annual Report on Form 10-K for the
fiscal year ended September 27, 2003 which is incorporated herein by
reference. These expenses included $7.6 million representing cash expenses
and $11.3 million representing non-cash charges associated with the
accelerated vesting of restricted common units.
(d) These amounts include, in addition to the gain on sale of assets and the
gain on sale of storage facility, gains from the disposal of property,
plant and equipment of $0.6 million for fiscal year 1999, $1.0 million for
fiscal year 2000, $3.8 million for fiscal year 2001, $0.5 million for
fiscal year 2002 and $0.6 million for fiscal year 2003.
(e) Gain on sale of customer service centers consists of nine customer service
centers we sold during fiscal year 2003 for total cash proceeds of
approximately $7.2 million. We recorded a gain on sale of approximately
$2.5 million, which has been accounted for within discontinued operations
pursuant to SFAS No. 144. Prior period results of operations attributable
to these nine customer service centers were not significant and, as such,
prior period results have not been reclassified to remove financial results
from continuing operations.
(f) Basic net income per limited partner unit is computed by dividing net
income, after deducting our general partner's interest, by the weighted
average number of outstanding common units. Diluted net income per limited
partner unit is computed by dividing net income, after deducting the
general partner's approximate 2% interest, by the weighted average number
of outstanding common units and time vested restricted units granted under
our 2000 Restricted Unit Plan.
(g) Depreciation and amortization expense for the year ended September 28, 2002
reflects the early adoption of SFAS No. 142 as of September 30, 2001 (the
beginning of our 2002 fiscal year). SFAS No. 142 eliminated the requirement
to amortize goodwill and certain intangible assets. Amortization expense
for the year ended September 28, 2002 reflects approximately $7.4 million
lower amortization expense compared to the year ended September 29, 2001 as
a result of the elimination of amortization expense associated with
goodwill.
(h) EBITDA represents net income before deducting interest expense, income
taxes, depreciation and amortization. Our management uses EBITDA as a
measure of liquidity and we are including it because we believe that it
provides our investors and industry analysts with additional information to
evaluate our ability to meet our debt service obligations and to pay our
quarterly distributions to holders of our common units. Moreover, our
existing senior note agreements and our revolving credit agreement require
us to use EBITDA as a component in calculating our leverage and interest
coverage ratios. EBITDA is not a recognized term under GAAP and should not
be considered as an alternative to net income or net cash provided by
operating activities determined in accordance with GAAP. Because EBITDA, as
determined by us excludes some, but not all, items that affect net income,
it may not be comparable to EBITDA or similarly titled measures used by
other companies. The following table sets forth (i) our calculation of
EBITDA and (ii) a reconciliation of EBITDA, as so calculated, to our net
cash provided by operating activities (amounts in thousands):
YEAR ENDED
------------------------------------------------------------------------------
SEPTEMBER 25, SEPTEMBER 30, SEPTEMBER 29, SEPTEMBER 28, SEPTEMBER 27,
1999 2000 2001 2002 2003
--------------- --------------- --------------- --------------- --------------
Net income ....................................... $ 22,439 $ 38,532 $ 53,510 $ 53,524 $ 48,669
Add:
Provision for income taxes ...................... 68 234 375 703 202
Interest expense, net ........................... 31,218 42,534 39,596 35,325 33,629
Depreciation and amortization ................... 34,453 37,032 36,496 28,355 27,520
---------- --------- --------- --------- ---------
EBITDA ........................................... 88,178 118,332 129,977 117,907 110,020
---------- --------- --------- --------- ---------
Add/(subtract):
Provision for income taxes ...................... (68) (234) (375) (703) (202)
Interest expense, net ........................... (31,218) (42,534) (39,596) (35,325) (33,629)
Gain on disposal of property, plant and
equipment, net ................................. (578) (11,313) (3,843) (546) (636)
Gain on sale of customer service
centers ........................................ -- -- -- -- (2,483)
Gain on sale of storage facility ................ -- -- -- (6,768) --
Changes in working capital and other
assets and liabilities ......................... 25,444 (4,784) 15,675 (5,790) (15,770)
---------- --------- --------- --------- ---------
Net cash provided by operating activities ........ $ 81,758 $ 59,467 $ 101,838 $ 68,775 $ 57,300
========== ========= ========= ========= =========
Net cash used in investing activities ............ $ (12,241) $ (99,067) $ (17,907) $ (6,851) $ (4,859)
========== ========= ========= ========= =========
Net cash used in financing activities ............ $ (120,944) $ 42,853 $ (59,082) $ (57,463) $ (77,631)
========== ========= ========= ========= =========
(i) Our capital expenditures fall generally into three categories: (i)
maintenance expenditures, which include expenditures for repair and
replacement of property, plant and equipment, (ii) growth capital
expenditures, which include new propane tanks and other equipment to
facilitate expansion of our customer base and operating capacity; and (iii)
acquisition capital expenditures, which include expenditures related to the
acquisition of propane and other retail operations and a portion of the
purchase price allocated to intangibles associated with such acquired
businesses.
S-23
AGWAY ENERGY SELECTED FINANCIAL AND OTHER DATA
The following financial data of Agway Energy, insofar as it relates to
each of the fiscal years 2001 through 2003, has been derived from the audited
combined consolidated financial statements, including the combined consolidated
balance sheets at June 30, 2003 and 2002 and the related combined consolidated
statements of operations and of cash flows for the years ended June 30, 2003,
2002 and 2001 and the notes thereto incorporated by reference in this
prospectus supplement. The combined financial statement data for the three
months ended September 30, 2003 and 2002 is unaudited data derived from Agway
Energy's accounting records.
(Amounts in thousands)
YEAR ENDED THREE MONTHS ENDED (A)
-------------------------------------- ------------------------------
JUNE 30, JUNE 30, JUNE 30, SEPTEMBER 30, SEPTEMBER 30,
2001 2002 2003 2002 2003
------------ ------------ ------------ --------------- --------------
STATEMENT OF OPERATIONS DATA
Revenues ................................ $ 724,474 $ 535,070 $686,625 $ 98,581 $111,598
Costs and expenses ...................... 697,052 516,504 652,400 109,131 120,541
Income (loss) before interest
expense and provision for
income taxes .......................... 27,422 18,566 34,225 (10,550) (8,943)
Interest expense, net ................... 5,412 5,517 5,014 1,142 1,125
Provision (benefit) for income taxes..... 7,597 5,567 10,843 (4,934) (4,178)
Net income (loss) ....................... $ 13,356 $ 7,482 $ 18,368 $ (6,758) $ (5,890)
BALANCE SHEET DATA (END OF PERIOD)
Current assets .................................... $ 74,361 $ 84,440 $ 82,392 $ 86,455
Total assets ...................................... 154,750 176,794 164,340 185,140
Current liabilities ............................... 64,044 67,713 72,769 80,987
Total liabilities ................................. $ 91,662 $ 95,481 $ 104,301 $109,140
STATEMENT OF CASH FLOWS DATA
Cash provided by (used in)
Operating activities .................. $ 21,947 $ 57,013 $ 19,079 $ 3,475 $ 8,446
Investing activities .................. (8,269) (5,273) (9,753) (1,863) (1,729)
Financing activities .................. $ (10,754) $ (52,600) $ (8,312) $ (1,361) $ (7,022)
OTHER DATA
Depreciation and amortization ........... $ 7,470 $ 7,148 $ 6,865 $ 1,704 $ 1,777
EBITDA (b) .............................. 34,892 25,714 41,090 (8,846) (7,166)
Capital expenditures .................... $ 10,536 $ 5,886 $ 10,151 $ 1,944 $ 1,862
Retail propane gallons sold ............. 99,385 88,342 106,282 12,427 12,792
Retail refined fuels gallons sold ....... 444,818 371,189 356,795 65,740 61,083
(a) The retail distribution of propane and fuel oil is a seasonal business
because of their primary use as sources of heat in residential and
commercial buildings. Consequently, sales and operating profits are
concentrated during the six-month peak heating season from October through
March. Accordingly, lower operating profits and either net losses or lower
net income during the period from April through September are expected.
(b) EBITDA represents net income before deducting interest expense, income
taxes, depreciation and amortization. Our management uses EBITDA as a
measure of liquidity and we are including it because we believe that it
provides our investors and industry analysts with additional information to
evaluate our ability to meet our debt service obligations and to pay our
quarterly distributions to holders of our common units. Moreover, our
existing senior note agreements and our revolving credit agreement require
us to use EBITDA as a component in calculating our leverage and interest
coverage ratios. EBITDA is not a recognized term under generally accepted
accounting principles ("GAAP") and should not be considered as an
alternative to net income or cash flow provided by operating activities
determined in accordance with GAAP. Because EBITDA, as determined by us,
excludes some, but not all, items that affect net income, it may not be
comparable to EBITDA or similarly titled measures used by other companies.
The following table sets forth (i) our calculation of EBITDA and (ii) a
reconciliation of EBITDA, as so calculated, to Agway Energy's net cash
provided by operating activities (amounts in thousands).
S-24
YEAR ENDED THREE MONTHS ENDED
-------------------------------------- ------------------------------
JUNE 30, JUNE 30, JUNE 30, SEPTEMBER 30, SEPTEMBER 30,
2001 2002 2003 2002 2003
------------ ------------ ------------ --------------- --------------
Net income (loss) ................................. $ 13,356 $ 7,482 $ 18,368 $ (6,758) $ (5,890)
Add:
Provision (benefit) for income taxes ............. 7,597 5,567 10,843 (4,934) (4,178)
Interest expense, net ............................ 5,412 5,517 5,014 1,142 1,125
Depreciation and amortization .................... 7,470 7,148 6,865 1,704 1,777
Cumulative effect of accounting change ........... 1,057 -- -- -- --
--------- --------- --------- -------- --------
EBITDA ............................................ 34,892 25,714 41,090 (8,846) (7,166)
--------- --------- --------- -------- --------
Add (subtract):
(Provision) benefit for income taxes ............. (7,597) (5,567) (10,843) 4,934 4,178
Interest expense, net ............................ (5,412) (5,517) (5,014) (1,142) (1,125)
Gain on disposal of property, plant and
equipment, net .................................. (982) (227) (114) (39) (36)
Cumulative effect of accounting change ............ (1,057) -- -- -- --
Changes in working capital and other assets
and liabilities ................................. 2,103 42,610 (6,040) 8,568 12,595
--------- --------- --------- -------- --------
Net cash provided by operating activities ......... $ 21,947 $ 57,013 $ 19,079 $ 3,475 $ 8,446
========= ========= ========= ======== ========
Net cash used in investing activities ............. $ (8,269) $ (5,273) $ (9,753) $ (1,863) $ (1,729)
========= ========= ========= ======== ========
Net cash used in financing activities ............. $ (10,754) $ (52,600) $ (8,312) $ (1,361) $ (7,022)
========= ========= ========= ======== ========
S-25
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The unaudited pro forma condensed combined financial statements give
effect to the Acquisition under the purchase method of accounting. The pro
forma adjustments are based upon available information and assumptions that
management believes are reasonable and factually supportable. A final
determination of purchase accounting adjustments, including the allocation of
the purchase price to the assets acquired and liabilities assumed based on
their respective fair values, has not been made. Accordingly, the purchase
accounting adjustments made in connection with the development of the unaudited
pro forma condensed combined financial statements are preliminary and have been
made solely for purposes of presenting such pro forma combined financial
information. The unaudited pro forma condensed combined financial statements do
not purport to represent what our financial position or results of operations
would have been if the purchase transaction had occurred on the dates indicated
below, nor do they purport to project our results of operations for any future
period.
The unaudited pro forma condensed combined balance sheet as of September
27, 2003 was prepared by combining our audited consolidated balance sheet as of
September 27, 2003 and the audited combined balance sheet of Agway Energy as of
June 30, 2003, giving effect to the pending Acquisition and the completion of
this offering and the concurrent private placement of senior notes due 2013 as
though they had been completed on September 27, 2003. The unaudited pro forma
condensed combined statement of operations for the period presented combines
our historical consolidated statement of operations for the year ended
September 27, 2003 and the historical combined statement of operations of Agway
Energy for the year ended June 30, 2003, giving effect to the Acquisition and
the completion of this offering and the concurrent private placement of senior
notes due 2013 as if they had occurred on September 29, 2002 (the beginning of
our 2003 fiscal year). The unaudited pro forma condensed combined statement of
operations does not give effect to any cost savings or other operating
efficiencies that are expected to result from the integration of the operations
of Agway Energy with our operations, including from the integration of back
office functions, office space and certain field operations.
S-26
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF SEPTEMBER 27, 2003
(IN THOUSANDS)
HISTORICAL
SUBURBAN HISTORICAL PRO FORMA PRO FORMA
PROPANE AGWAY ENERGY ADJUSTMENTS COMBINED
----------- -------------- ------------------- ----------
ASSETS
Current assets:
Cash and cash equivalents .................. $ 15,765 $ 4,180 $(4,180 )(a) $ 23,690
7,925 (b)
Accounts receivable, less allowance for
doubtful accounts ........................ 36,437 57,842 -- 94,279
Inventories ................................ 41,510 12,150 -- 53,660
Deferred tax assets ........................ -- 2,259 (2,259)(a) 450
450 (c)
Prepaid expenses and other current
assets ................................... 5,200 8,009 (7,548)(a) 8,101
2,440 (d)
-------- -------- -------------- --------
Total current assets ..................... 98,912 84,440 (3,172) 180,180
Property, plant and equipment, net .......... 312,790 78,567 26,433 (e) 417,790
Goodwill .................................... 243,236 -- 23,926 (f) 267,162
Other intangible assets, net ................ 1,035 388 (388)(a) 51,035
50,000 (e)
Receivable from Agway, Inc. ................. -- 12,723 (12,723)(a) --
Other assets ................................ 9,657 676 (676)(a) 18,190
4,000 (g)
4,533 (d)
-------- -------- -------------- --------
Total assets ............................. $665,630 $176,794 $ 91,933 $934,357
======== ======== ============== ========
LIABILITIES AND PARTNERS'
CAPITAL/COMBINED EQUITY
Current liabilities:
Accounts payable ........................... $ 26,204 $ 13,344 $ -- $ 39,548
Current portion of long-term borrowings..... 42,911 -- -- 42,911
Customer deposits and advances ............. 23,958 18,821 -- 42,779
Other current liabilities .................. 44,640 35,548 (29,444)(a) 50,744
-------- -------- -------------- --------
Total current liabilities ................ 137,713 67,713 (29,444) 175,982
Long-term borrowings ........................ 340,915 -- 150,000 (h) 490,915
Deferred tax liabilities .................... -- 12,849 (12,849)(a) --
Pension and other postretirement benefit
obligations ................................ 75,571 -- -- 75,571
Other liabilities ........................... 27,353 14,919 (10,386)(a) 31,886
-------- -------- -------------- --------
Total liabilities ........................ 581,552 95,481 97,321 774,354
-------- -------- -------------- --------
Partners' capital/combined equity ........... 84,078 81,313 (81,313)(a) 160,003
75,925 (i)
-------- -------- -------------- --------
Total liabilities and partners'
capital/combined equity ................. $665,630 $176,794 $ 91,933 $934,357
======== ======== ============== ========
See accompanying notes.
S-27
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 27, 2003
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
HISTORICAL
SUBURBAN HISTORICAL PRO FORMA PRO FORMA
PROPANE AGWAY ENERGY ADJUSTMENTS COMBINED
------------- -------------- ----------------- ---------------
Revenues
Propane, fuel oil and other fuels .......... $ 680,741 $615,364 $ -- $ 1,296,105
Other ...................................... 90,938 71,261 -- 162,199
--------- -------- ---------- -----------
771,679 686,625 -- 1,458,304
Costs and expenses
Cost of products sold ...................... 376,783 472,341 -- 849,124
Operating .................................. 250,698 154,945 -- 405,643
Selling, general and administrative ........ 36,661 18,249 (2,300)(j) 52,610
Depreciation and amortization .............. 27,520 6,865 (6,865)(k) 36,120
8,600 (l)
--------- -------- ---------- -----------
691,662 652,400 (565) 1,343,497
--------- -------- ---------- -----------
Income before interest expense and
provision for income taxes ................. 80,017 34,225 565 114,807
Interest expense, net ....................... 33,629 5,014 (5,014)(k) 45,654
12,025 (m)
--------- -------- ---------- -----------
Income before provision for income taxes..... 46,388 29,211 (6,446) 69,153
Provision for income taxes .................. 202 10,843 (10,843)(k) 4,202
4,000 (n)
--------- -------- ---------- -----------
Income from continuing operations (o) ....... $ 46,186 $ 18,368 $ 397 $ 64,951
========= ======== ========== ===========
General Partner's interest in income from
continuing operations ...................... $ 1,129 $ 1,588
--------- -----------
Limited Partners' interest in income from
continuing operations ...................... $ 45,057 $ 63,363
========= ===========
Income from continuing operations per
common unit--basic ......................... $ 1.78 $ 2.27
========= ===========
Weighted average number of common
units outstanding--basic ................... 25,359 27,959
========= ===========
Income from continuing operations per
common unit--diluted ....................... $ 1.77 $ 2.26
========= ===========
Weighted average number of common
units outstanding--diluted ................. 25,495 28,095
========= ===========
See accompanying notes.
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The consideration to be paid and preliminary purchase price allocation based
upon estimated fair values are as follows (in thousands):
Cash consideration to be paid at closing .............................................. $206,000
Estimated Acquisition-related costs and expenses, including fees for investment
bankers, attorneys, accountants and other out-of-pocket costs ........................ 8,000
--------
Total cost of Acquisition ............................................................. $214,000
========
Net working capital ................................................................... $ 34,624
Property, plant and equipment ......................................................... 105,000
Identifiable intangible assets, including customer lists and non-compete agreements ... 50,000
Deferred tax assets ................................................................... 450
Goodwill .............................................................................. 23,926
--------
Total cost of Acquisition ............................................................. $214,000
========
In preparing the unaudited pro forma condensed combined financial
statements, we have made adjustments to the historical financial statements
related to the Acquisition in the purchase business combination of certain
assets of Agway Energy, including the financing in connection with this
Acquisition. The pre-Acquisition historical results of operations for Agway
Energy are presented separately from Acquisition adjustments. The pro forma
adjustments for the dates specified above are as follows:
(a) Reflects the elimination of assets not acquired and liabilities not assumed
by us and the elimination of Agway Energy's equity accounts.
(b) Reflects the combined net proceeds of $221.8 million from the public
offering of common units offered hereby ($75.9 million net of underwriting
discounts and offering expenses) and the concurrent private placement of
$150.0 million senior notes due 2013 ($145.9 million net of estimated bank
fees) to finance the Acquisition and estimated Acquisition-related costs
and expenses of $8.0 million. The remaining net proceeds of $7.9 million
are expected to be used to fund estimated costs to integrate the operations
of Agway Energy with our operations.
(c) Reflects deferred tax asset established in connection with temporary
differences related to the allowance for bad debts.
(d) Agway Energy's combined balance sheet as of June 30, 2003 included an
environmental reserve in the amount of $7.0 million ($2.5 million within
other current liabilities and $4.5 million within other liabilities). Based
on our current best estimate of future costs for environmental
investigations, remediation and ongoing monitoring activities associated
with acquired properties with either known or probable environmental
exposures, the pro forma combined current and noncurrent liabilities
reflect such reserve amounts. Under the Purchase Agreement, Agway, Inc. has
set aside $15.0 million from the total purchase price in a separate escrow
account to fund such future environmental costs and expenses. Accordingly,
this adjustment is to record a corresponding asset of $7.0 million ($2.5
million within other current assets and $4.5 million within other assets)
related to the future reimbursement from escrowed funds for environmental
spending. Under the terms of the Purchase Agreement, the escrowed funds
will be used to fund such environmental remediation costs during the first
three years following the closing date of the Acquisition. Subject to
amounts withheld with respect to any pending claims made prior to the third
anniversary of the closing date of the Acquisition, any remaining escrowed
funds will be remitted to Agway, Inc. at the end of the three-year period.
(e) Reflects the pro forma allocation of the purchase price to record property,
plant and equipment acquired at their estimated fair value and to establish
an estimate of the fair value of identifiable intangible assets. Acquired
property, plant and equipment consist primarily of land and improvements;
buildings and improvements; transportation equipment; storage facilities;
and equipment, primarily tanks and cylinders. For purposes of the pro forma
adjustments, we have estimated a composite life of 20 years for property,
plant and equipment. The composite life is
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calculated by taking the weighted average lives of the separate asset
groups with useful lives ranging from 3 to 40 years. Identifiable
intangible assets consist primarily of customer lists, with an estimated
amortization period of 15 years, and non-compete agreements to be amortized
over the periods of the related agreements.
(f) Reflects the establishment of goodwill related to the estimate of the
excess of the total cost of the Acquisition over the fair value of assets
acquired and liabilities assumed. Goodwill recorded in connection with this
Acquisition will not be amortized in accordance with SFAS No. 142. For
purposes of the pro forma presentation, the allocation of the purchase
price to the assets acquired and liabilities assumed was based on our
preliminary assessment of fair values. It is possible that an additional
portion of the purchase price may be allocated to identifiable intangible
assets or property, plant and equipment, thus reducing the amount of excess
purchase price to be allocated to goodwill. For every $1.0 million
reduction in goodwill for additional value to be assigned to identifiable
intangible assets or property, plant and equipment, depreciation and
amortization expense would increase by approximately $0.1 million assuming
a 10-year useful life.
(g) Reflects pro forma adjustment to record estimated debt issuance costs to be
paid in connection with the private placement of $150.0 million of senior
notes due 2013 to finance the Acquisition.
(h) Reflects the pro forma adjustment to long-term debt to reflect the private
placement of $150.0 million of senior notes due 2013 to finance a portion
of the Acquisition and related costs and expenses.
(i) Reflects the pro forma adjustment to partners' capital to reflect estimated
net proceeds of $75.9 million from the issuance of 2,600,000 common units
in a public offering of common units at an offering price of $30.90 per
common unit.
(j) Reflects the pro forma adjustment to eliminate postretirement medical
expenses included within Agway Energy's historical statement of operations.
Under the terms of the Purchase Agreement, we have not assumed the retiree
medical plan of Agway Energy nor did we assume any of the associated
liabilities for the plan. Our postretirement medical plan was frozen to new
participants effective January 1, 2000 and, as such, comparable benefits
will not be provided by us.
(k) Reflects the adjustment to eliminate the Agway Energy historical
depreciation and amortization expense, interest expense and provision for
income taxes.
(l) Reflects pro forma adjustment to depreciation and amortization expense
based on the portion of the purchase price preliminarily allocated to
property, plant and equipment and amortizable intangible assets based on
the composite useful life of property, plant and equipment and a 15-year
life for intangible assets, as described in (e) above, recorded on a
straight-line basis.
(m) Reflects pro forma interest expense related to the estimated $150.0 million
private placement of senior notes due 2013 to be used to finance the
Acquisition at an assumed interest rate commensurate with those of
similarly situated companies, as well as amortization of debt issuance
costs over a period of 10 years.
(n) Reflects pro forma income taxes for the portion of the acquired assets and
operations that will not be operated by our operating partnership.
(o) Income from continuing operations does not include a gain on the sale of
nine customer service centers in the amount of $2.5 million reported within
our historical statement of operations for the year ended September 27,
2003 as the gain was reflected within discontinued operations under SFAS
No. 144.
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BUSINESS
INTRODUCTION
We are a publicly traded Delaware limited partnership. Through our
operating partnership and its subsidiaries, we engage in the retail and
wholesale marketing of propane and related appliances, parts and services. We
believe, based on LP/Gas Magazine dated February 2003, that we were the third
largest retail marketer of propane in the United States, measured by retail
gallons sold in the year 2002. As of September 27, 2003, we were serving
approximately 750,000 active residential, commercial, industrial and
agricultural customers from approximately 320 customer service centers in 40
states located primarily in the east and west coast regions of the country. We
sold approximately 491.5 million gallons of propane to retail customers during
our last fiscal year, which ended September 27, 2003. During the same year, we
sold an additional 31.7 million gallons of propane at wholesale, primarily to
large industrial end-users and other propane distributors. Together with our
predecessor companies, we have been continuously engaged in the retail propane
business since 1928. For a description of the business of Agway Energy, see
"The Acquisition."
INDUSTRY BACKGROUND
Propane is a by-product of natural gas processing and petroleum refining.
It is a clean-burning energy source recognized for its transportability and
ease of use relative to alternative forms of stand-alone energy sources.
Propane use falls into three broad categories:
o residential and commercial applications;
o industrial applications; and
o agricultural uses.
In the residential and commercial markets, propane is used primarily for
space heating, water heating, clothes drying and cooking. Industrial customers
use propane generally as a motor fuel to power over-the-road vehicles,
forklifts and stationary engines, to fire furnaces, as a cutting gas and in
other process applications. In the agricultural market, propane is used most
often for tobacco curing, crop drying, poultry brooding and weed control.
Propane is extracted from natural gas or oil wellhead gas at processing
plants or separated from crude oil during the refining process. It is normally
transported and stored in a liquid state under moderate pressure or
refrigeration for ease of handling in shipping and distribution. When the
pressure is released or the temperature is increased, it becomes a flammable
gas that is colorless and odorless, although an odorant is added to allow its
detection. Propane is clean burning and when consumed produces only negligible
amounts of pollutants.
OUR STRATEGY
Our business strategy is to deliver increasing value to our unitholders
through initiatives, both internal and external, that are geared toward
achieving sustainable profitable growth and increased quarterly distributions.
We pursue this business strategy through a combination of:
o an internal focus on enhancing customer service, growing and retaining
our customer base and improving the efficiency of operations; and
o acquisitions of businesses to complement or supplement our core
propane operations.
Over the past several years, we have focused on improving the efficiency
of our operations and our cost structure, strengthening our balance sheet and
distribution coverage and building a platform for growth. We continue to pursue
internal growth of our existing propane operations and to foster the growth of
related retail and service operations that can benefit from our infrastructure
and national presence. We invest in enhancements to our technology
infrastructure to increase operating efficiencies and to develop marketing
programs and incentive compensation arrangements focused on customer growth and
retention. We measure and reward the success of our customer service
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centers based on a combination of profitability of the individual customer
service center, customer growth and satisfaction statistics and asset
utilization measures. Additionally, we continuously evaluate our existing
facilities to identify opportunities to optimize our return on assets by
selectively divesting operations in slower growing markets and seek to reinvest
in markets that present more opportunities for growth.
In addition to our internal growth strategies, we have evaluated several
acquisition opportunities both within the propane sector, as well as in other
energy-related businesses, in an effort to accelerate our overall growth
strategy. Our acquisition strategy is to focus on businesses with a relatively
steady cash flow that will either extend our presence in strategically
attractive propane markets, complement our existing network of propane
operations or provide an opportunity to diversify our operations with other
energy-related assets. In this regard, we believe that the Acquisition
significantly enhances our position in the northeast propane market and expands
our product and service offerings to further support our overall growth
objectives.
PRODUCTS, SERVICES AND MARKETING
We distribute propane through a nationwide retail distribution network
consisting of approximately 320 customer service centers in 40 states as of
September 27, 2003. Our operations are concentrated in the east and west coast
regions of the United States. In fiscal 2003, we served approximately 750,000
active customers. Approximately two-thirds of our retail propane volume has
historically been sold during the six month peak heating season from October
through March, as many customers use propane for heating purposes. Typically,
customer service centers are found in suburban and rural areas where natural
gas is not readily available. Generally, such locations consist of an office,
appliance showroom, warehouse and service facilities, with one or more 18,000
to 30,000 gallon storage tanks on the premises. Most of our residential
customers receive their propane supply pursuant to an automatic delivery system
that eliminates the customer's need to make an affirmative purchase decision.
From our customer service centers, we also sell, install and service equipment
related to our propane distribution business, including heating and cooking
appliances, hearth products and supplies and, at some locations, propane fuel
systems for motor vehicles.
We sell propane primarily to six customer markets: residential,
commercial, industrial (including engine fuel), agricultural, other retail
users and wholesale. Approximately 94% of the gallons sold by the Partnership
in fiscal 2003 were to retail customers: 41% to residential customers, 30% to
commercial customers, 10% to industrial customers, 6% to agricultural customers
and 13% to other retail users. The balance of approximately 6% of the gallons
sold by us in fiscal 2003 was for risk management activities and wholesale
customers. Sales to residential customers in fiscal 2003 accounted for
approximately 59% of our margins on propane sales, reflecting the higher-margin
nature of the residential market. No single customer accounted for 10% or more
of our revenues during fiscal 2003.
Retail deliveries of propane are usually made to customers by means of
bobtail and rack trucks. Propane is pumped from the bobtail truck, with
capacities ranging from 2,125 gallons to 2,975 gallons of propane, into a
stationary storage tank on the customer's premises. The capacity of these
storage tanks ranges from approximately 100 gallons to approximately 1,200
gallons, with a typical tank having a capacity of 300 to 400 gallons. We also
deliver propane to retail customers in portable cylinders, which typically have
a capacity of 5 to 35 gallons. When these cylinders are delivered to customers,
empty cylinders are refilled in place or transported for replenishment at our
distribution locations. We also deliver propane to certain other bulk end users
of propane in larger trucks known as transports (which have an average capacity
of approximately 9,000 gallons). End-users receiving transport deliveries
include industrial customers, large-scale heating accounts, such as local gas
utilities that use propane as a supplemental fuel to meet peak load
deliverability requirements, and large agricultural accounts that use propane
for crop drying. Propane is generally transported from refineries, pipeline
terminals, storage facilities (including our storage facilities in Elk Grove,
California and Tirzah, South Carolina), and coastal terminals to our customer
service centers by a combination of common carriers, owner-operators and
railroad tank cars.
S-32
In our wholesale operations, we principally sell propane to large
industrial end-users and other propane distributors. The wholesale market
includes customers who use propane to fire furnaces, as a cutting gas and in
other process applications. Due to the low margin nature of the wholesale
market as compared to the retail market, we have selectively reduced our
emphasis on wholesale marketing over the last few years. Accordingly, sales of
wholesale gallons during fiscal 2003 decreased in comparison to fiscal 2002,
which also decreased from fiscal 2001.
PROPANE SUPPLY
We purchase propane from nearly 70 oil companies and natural gas
processors at approximately 180 supply points located in the United States and
Canada. We make purchases primarily under one-year agreements that are subject
to annual renewal, but we also purchase propane on the spot market. Supply
contracts generally provide for pricing in accordance with posted prices at the
time of delivery or the current prices established at major storage points, and
some contracts include a pricing formula that typically is based on prevailing
market prices. Some of these agreements provide maximum and minimum seasonal
purchase guidelines. We use a number of interstate pipelines, as well as
railroad tank cars and delivery trucks to transport propane from suppliers to
storage and distribution facilities.
Historically, supplies of propane from our customary sources have been
readily available. Although we make no assurance regarding the availability of
supplies of propane in the future, we currently expect to be able to secure
adequate supplies during fiscal 2004. During fiscal 2003, Dynegy Liquids
Marketing and Trade and Enterprise Products Operating L.P. accounted for
approximately 21% and 13%, respectively, of our total domestic propane supply.
The availability of our propane supply is dependent upon several factors,
including the severity of winter weather and the price and availability of
competing fuels such as natural gas and heating oil. We believe that if
supplies from Dynegy or Enterprise were interrupted, we would be able to secure
adequate propane supplies from other sources without a material disruption of
our operations. Nevertheless, the cost of acquiring such propane might be
higher and, at least on a short-term basis, margins could be affected. Aside
from these two suppliers, no single supplier accounted for more than 10% of our
total domestic propane supply in fiscal 2003. During that year, approximately
98% of our total propane purchases were from domestic suppliers.
We seek to reduce the effect of propane price volatility on our product
costs and to help ensure the availability of propane during periods of short
supply. We are currently a party to propane futures transactions on the New
York Mercantile Exchange and to forward and option contracts with various third
parties to purchase and sell product at fixed prices in the future. These
activities are monitored by our senior management through enforcement of our
commodity trading policy.
We operate large propane storage facilities in California and South
Carolina. We also operate smaller storage facilities in other locations and
have rights to use storage facilities in additional locations. As of September
27, 2003 the majority of the storage capacity in California and South Carolina
was leased to third parties. These storage facilities enable us to buy and
store large quantities of propane during periods of low demand and lower
prices, which generally occur during the summer months. This practice helps
ensure that we have a more secure supply of propane during periods of intense
demand or price instability.
TRADEMARKS
We utilize a variety of trademarks and trade names owned by us, including
"Suburban Propane," "Gas Connection," and "Suburban @ Home." We regard our
trademarks, trade names and other proprietary rights as valuable assets and
believe that they may have significant value in the marketing of our products.
COMPETITION
According to the Energy Information Administration, propane accounts for
approximately 4% of household energy consumption in the United States. This
level has not changed materially over the
S-33
previous two decades. As an energy source, propane competes primarily with
electricity, natural gas and fuel oil, principally on the basis of price,
availability and portability.
Propane is more expensive than natural gas on an equivalent British
Thermal Unit basis in locations served by natural gas, but it is an alternative
to natural gas in rural and suburban areas where natural gas is unavailable or
portability of product is required. Historically, the expansion of natural gas
into traditional propane markets has been inhibited by the capital costs
required to expand pipeline and retail distribution systems. Although the
recent extension of natural gas pipelines to previously unserved geographic
areas tends to displace propane distribution in those areas, we believe new
opportunities for propane sales have been arising as new neighborhoods are
developed in geographically remote areas.
We also have some relative advantages over suppliers of other sources of
energy. For example, propane is generally less expensive to use than
electricity for space heating, water heating, clothes drying and cooking. Fuel
oil has not been a significant competitor due to the current geographical
diversity of our operations, and propane and fuel oil compete to a lesser
extent because of the cost of converting from one to the other.
In addition to competing with suppliers of other sources of energy, we
compete with other retail propane distributors. Competition in the retail
propane industry is highly fragmented and generally occurs on a local basis
with other large full-service multi-state propane marketers, thousands of
smaller local independent marketers and farm cooperatives. Based on industry
statistics contained in 2001 Sales of Natural Gas Liquids and Liquified
Refinery Gases, as published by the American Petroleum Institute in November
2002, and LP/Gas Magazine dated February 2003, the ten largest retailers,
including us, account for approximately 29% of the total retail sales of
propane in the United States, and that no single marketer has a greater than
10% share of the total retail market in the United States. Based on industry
statistics contained in 2001 Sales of Natural Gas Liquids and Liquified
Refinery Gases, as published by the American Petroleum Institute in November
2002, we accounted for approximately 4.4% of the domestic retail market for
propane during the year 2001.
Most of our customer service centers compete with five or more other
marketers or distributors. However, each of our customer service centers
operates in its own competitive environment because retail marketers tend to
locate in close proximity to customers in order to lower the cost of providing
service. Our typical customer service center has an effective marketing radius
of approximately 50 miles, although in certain rural areas the marketing radius
may be extended by a satellite office.
ENVIRONMENTAL AND SAFETY MATTERS
We are subject to various federal, state and local environmental, health
and safety laws and regulations. Generally, these laws impose limitations on
the discharge of pollutants and establish standards for the handling of solid
and hazardous wastes and can require the investigation and cleanup of
environmental contamination. These laws include the Resource Conservation and
Recovery Act, the Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA"), the Clean Air Act, the Occupational Safety and Health
Act, the Emergency Planning and Community Right to Know Act, the Clean Water
Act and comparable state statutes. CERCLA, also known as the "Superfund" law,
imposes joint and several liability without regard to fault or the legality of
the original conduct on certain classes of persons that are considered to have
contributed to the release or threatened release of a "hazardous substance"
into the environment. Propane is not a hazardous substance within the meaning
of CERCLA; however, we own real property at locations where hazardous
substances may exist as a result of prior activities.
National Fire Protection Association Pamphlets No. 54 and No. 58, which
establish rules and procedures governing the safe handling of propane, or
comparable regulations, have been adopted, in whole, in part or with state
addenda, as the industry standard in all states in which we operate. In some
states these laws are administered by state agencies, and in others they are
administered on a municipal level. Pamphlet No. 58 has adopted storage tank
valve retrofit requirements due to be complete by June 2011. A program is in
place to meet the deadline. We also are subject to regulations promulgated
under the Federal Motor Carrier Safety Act with respect to the transportation
S-34
of propane by truck. These regulations cover the transportation of hazardous
materials and are administered by the United States Department of
Transportation. We conduct ongoing training programs to help ensure that our
operations comply with applicable safety regulations. We also maintain various
permits that are necessary to operate our facilities, some of which may be
material to our operations. We believe that our procedures for the handling,
storage and distribution of propane are consistent with industry standards and
comply in all material respects with applicable laws and regulations.
The Department of Transportation has established regulations addressing
emergency discharge control issues. The regulations, which became effective as
of July 1, 1999, required us to modify the inspection and record keeping
procedures for our cargo tank vehicles. A schedule of compliance is set forth
within the regulations. We have implemented the required discharge control
systems and comply, in all material respects, with current regulatory
requirements.
Future developments, such as stricter environmental, health or safety laws
and regulations thereunder, could affect our operations. We do not anticipate
that the costs of our compliance with environmental, health and safety laws and
regulations, including CERCLA, will have a material adverse effect on our
financial condition or results of operations. To the extent that there are any
environmental liabilities unknown to us or environmental, health or safety laws
or regulations are made more stringent, there can be no assurance that our
financial condition or results of operations will not be materially and
adversely affected.
EMPLOYEES
As of September 27, 2003, we had approximately 2,973 full time employees,
of whom approximately 285 were engaged in general and administrative activities
(including fleet maintenance), 29 were engaged in transportation and product
supply activities and the balance were customer service center employees. As of
September 27, 2003, approximately 145 of our employees were represented by 10
different local chapters of labor unions. We believe that our relations with
both our union and non-union employees are satisfactory. From time to time, we
also hire temporary workers to meet peak seasonal demands.
PROPERTIES
As of September 27, 2003, we owned approximately 70% of our customer
service center and satellite locations and leased the balance of our locations
from third parties. In addition, we own and operate a 22 million gallon
refrigerated, above-ground propane storage facility in Elk Grove, California
and a 60 million gallon underground propane storage cavern in Tirzah, South
Carolina. Additionally, we own our principal executive offices located in
Whippany, New Jersey.
The transportation of propane requires specialized equipment. The trucks
and railroad tank cars utilized for this purpose carry specialized steel tanks
that maintain the propane in a liquefied state. As of September 27, 2003, we
had a fleet of seven transport truck tractors, of which we owned five, and 251
railroad tank cars, all of which we leased. In addition, as of September 27,
2003, we used 1,148 bobtail and rack trucks, of which we owned approximately
27%, and 1,339 other delivery and service vehicles, of which approximately 29%
were owned by us. Vehicles that are not owned by us are leased. As of September
27, 2003, we also owned approximately 771,700 customer storage tanks with
typical capacities of 100 to 500 gallons, approximately 37,400 customer storage
tanks with typical capacities of over 500 gallons, and approximately 137,700
portable cylinders with typical capacities of five to ten gallons.
LEGAL PROCEEDINGS
Our operations are subject to all operating hazards and risks normally
incidental to handling, storing, and delivering combustible liquids such as
propane. As a result, we have been, and will continue to be, a defendant in
various legal proceedings and litigation arising in the ordinary course of
business. We are self-insured for general and product, workers' compensation
and automobile
S-35
liabilities up to predetermined amounts above which third party insurance
applies. We believe that the self-insured retentions and coverage we maintain
are reasonable and prudent. Although any litigation is inherently uncertain,
based on past experience, the information currently available to us, and the
amount of our self-insurance reserves for known and unasserted self-insurance
claims (which was approximately $28.6 million at September 27, 2003), we do not
believe that these pending or threatened litigation matters, or known claims or
known contingent claims, will have a material adverse effect on our results of
operations, financial condition or our cash flow.
On May 23, 2001, our operating partnership was named as an additional
defendant in an action previously brought by Heritage Propane Partners, L.P. in
the South Carolina Court of Common Pleas, Fifth Judicial Circuit, against SCANA
Corporation and Cornerstone Ventures, L.P. (Heritage v. SCANA et al., Civil
Action 01-CP-40-3262). Third party insurance and the self insurance reserves do
not apply to this action. The amended complaint alleges, among other things,
that SCANA breached a contract for the sale of propane assets and asserts
claims against our operating partnership for wrongful interference with
prospective advantage and civil conspiracy for allegedly interfering with
Heritage's prospective contract with SCANA. Heritage claims that it is entitled
to recover its alleged lost profits in the amount of $125.0 million and that
all defendants are jointly and severally liable to it for this amount. On
October 24, 2001, a motion by our operating partnership to dismiss the claims
asserted against it was denied. Currently, discovery is ongoing among all
parties. On February 6, 2003, Heritage filed a motion to amend its complaint to
assert additional claims against all defendants, including three new claims
against our operating partnership: aiding and abetting; misappropriation; and
unjust enrichment. The court granted this motion. On May 5, 2003, our operating
partnership filed a motion for summary judgment to dismiss the claims asserted
against it in the original complaint filed against our operating partnership.
We withdrew this motion for strategic reasons but intend to refile it at a
later date. However, we cannot predict the outcome of this motion for summary
judgment. Discovery is ongoing between all parties to the lawsuit. We do not
anticipate that this matter will be tried before the Spring of 2004. We believe
that the claims and proposed additional claims against our operating
partnership are without merit and are defending the action vigorously. If this
matter proceeds to trial, we cannot predict the outcome of this trial, or, if
the trial is before a jury, what verdict the jury ultimately may reach. See
"Risk Factors--Risks Inherent in Our Business--We are subject to litigation
that is not covered by insurance and could adversely affect our operating
results."
S-36
THE ACQUISITION
ACQUISITION OF AGWAY ENERGY ASSETS
On November 10, 2003, we entered into an asset purchase agreement (the
"Purchase Agreement") to acquire substantially all of the assets and operations
of Agway Energy for $206.0 million in cash, subject to certain purchase price
adjustments. Agway Energy, based in Syracuse, New York, is a leading regional
marketer of propane, fuel oil, gasoline and diesel fuel primarily in New York,
Pennsylvania, New Jersey and Vermont. We believe, based on LP/Gas Magazine
dated February 2003, that Agway Energy is the eighth largest retail propane
marketer in the United States, operating through approximately 139 distribution
and sales centers. Agway Energy is also one of the leading marketers and
distributors of fuel oil in the northeast region of the United States. To
complement its core marketing and delivery business, Agway Energy installs and
services a wide variety of home comfort equipment, particularly in the area of
HVAC. Additionally, to a lesser extent, Agway Energy markets natural gas and
electricity in New York and Pennsylvania. For its fiscal year ended June 30,
2003, Agway Energy served more than 400,000 active customers across all of its
lines of business and sold approximately 106.3 million gallons of propane and
approximately 356.8 million gallons of refined fuels, including fuel oil,
gasoline and diesel fuel to residential, commercial and agricultural customers.
For its fiscal year ended June 30, 2003, Agway Energy generated revenues of
$686.6 million, EBITDA of $41.1 million and cash flow from operating activities
of $19.1 million. See "Agway Energy Selected Financial and Other Data" for our
calculation of EBITDA, as well as a reconciliation of EBITDA to cash provided
by operating activities.
We believe the Acquisition is consistent with our business strategy of
prudently pursuing acquisitions of retail propane distributors and other
energy-related businesses that can complement or supplement our core propane
operations. The Acquisition is expected to provide many strategic benefits to
us, including:
o FURTHER STRENGTHENING OUR POSITION IN THE NORTHEAST ENERGY DISTRIBUTION
MARKET
Agway Energy is a well-known propane and fuel oil marketer in the
northeast energy market, with approximately 139 distribution and sales
centers and more than 400,000 active customers. The Acquisition will
significantly expand our presence in the northeast retail propane market.
Additionally, Agway Energy's extensive presence in the fuel oil delivery
business expands our product offerings in the attractive northeast energy
market. The Acquisition provides an opportunity to leverage our existing
management expertise and technology to enhance operational efficiencies
of our combined business.
o YIELDING LONG-TERM COST SAVINGS
The geography of Agway Energy's distribution and service centers overlaps
with Suburban's in the northeast market. In the short-term, we expect
synergies will come from integrating back office functions, office space
and certain field operations. Additionally, we expect to leverage our
existing supply relationships to achieve improved purchasing power for
the combined entity. Longer-term cost savings are expected to result from
utilizing Suburban's information systems, including our truck routing
technology, as well as implementing programs for improved asset
utilization.
o ENHANCING OUR EXISTING HVAC BUSINESS
Agway Energy's HVAC business is more mature than our Suburban @ Home
operations and is expected to provide an opportunity to accelerate the
growth of this business. In addition, the Acquisition gives us the
opportunity to acquire many skilled and experienced service people who
can enhance the overall service offering to our existing customer base.
For the twelve months ended September 30, 2003 approximately 96% of
gallons sold by Agway Energy were to retail customers, of which 48% were to
residential customers, 39% to commercial customers and 13% to agricultural
customers. The propane, fuel oil and HVAC markets in which Agway Energy
competes are generally fragmented and consist of a large number of smaller,
local marketers, along with other regional or national marketers.
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The majority of Agway Energy's distribution and sales centers distribute,
sell, service and cross-sell multiple product offerings from a single location
under a common market management team. Generally, such locations consist of an
office location with a market manager, distribution manager, HVAC manager,
customer service manager, drivers, service technicians and customer service
representatives. Additionally, a typical location will include one or more
20,000 gallon fuel oil storage tanks and one or more 30,000 gallon propane
storage tanks.
As of September 30, 2003, Agway Energy had approximately 1,840 full time
employees, of whom approximately 1,650 were engaged in selling, distribution,
service and other field operations and the balance of 190 were principally back
office and corporate management personnel. Additionally, in order to meet peak
seasonal demands, particularly in its customer call center operations, Agway
Energy hires temporary or seasonal employees. Agway Energy had a fleet of
approximately 1,600 fuel oil delivery trucks, propane bobtails, transport
trailers, service vans and other delivery trucks as of September 30, 2003, of
which 15% were owned. Vehicles that are not owned are leased by Agway Energy.
Agway Energy's operations are managed primarily through the following four
business units: (1) propane; (2) refined fuels, including fuel oil, gasoline
and diesel fuel; (3) HVAC; and (4) other energy. The following provides a brief
summary of the characteristics of each business unit:
PROPANE
The propane business unit is primarily engaged in the retail distribution
of propane to residential, commercial and agricultural customers. Propane
customers are served from 82 distribution and sales centers. As of September
30, 2003, Agway Energy was serving more than 215,000 active customers in the
propane business unit. Retail deliveries of propane are usually made to
customers by means of Agway Energy's fleet of approximately 567 bobtail and
rack trucks, of which 49% were owned. Approximately 53% of the propane business
unit's retail sales are made to residential customers and 47% of retail sales
are made to commercial and agricultural customers.
In the northeast, Agway Energy's propane business unit competes with other
large full-service multi-state propane marketers, smaller local independent
marketers and farm co-operatives. Most of the propane business unit's
distribution and sales centers compete with five or more marketers or
distributors. The ability to compete effectively within the propane industry
depends on the reliability of service, responsiveness to customers and the
ability to maintain competitive prices. Agway Energy's propane business unit
believes that its superior service capabilities, complement of additional
service offerings and customer responsiveness differentiates it from many of
its competitors.
Agway Energy's propane is supplied by more than 19 suppliers at more than
18 supply points located in the United States and Canada, many of which
suppliers also supply us. The majority of the propane supply for Agway Energy's
propane business unit is purchased under annual supply contracts that generally
provide for pricing in accordance with market prices at the time of delivery.
Refer to "Business" for a more detailed description of the industry,
competitive and regulatory factors impacting the propane business unit.
REFINED FUELS
The refined fuels business includes fuel oil delivery to residential and
commercial customers, as well as the delivery of gasoline and diesel fuel
either by delivery directly to users or distributed through a network of
service stations at certain Agway Energy locations. For the twelve months ended
September 30, 2003, approximately 71% of Agway Energy's fuel oil gallons sold
were made to residential customers, primarily for home heating, and the
remainder to commercial customers. As with propane, and to a greater extent,
the fuel oil business is seasonal with the majority of sales and operating
profits concentrated during the peak heating months of October through March.
The fuel oil industry is a mature industry with total demand expected to
remain relatively flat to moderately declining. The fuel oil business competes
with other fuel oil distributors offering a broad
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range of services and prices, from full service distributors, like Agway
Energy, to those that solely offer the delivery service. Agway Energy has
developed a wide range of sales programs and service offerings for its fuel oil
customer base in an attempt to be viewed as a full-service energy provider and
to build customer loyalty. For instance, like most companies in the fuel oil
business, Agway Energy provides home heating equipment repair service on a
24-hour a day basis. The fuel oil business unit also competes for retail
customers with suppliers of alternative energy sources, principally, natural
gas, propane and electricity.
As of September 30, 2003, approximately 60% of the fuel oil sales were
made to individual customers under agreements pre-establishing a fixed or
maximum price per gallon over a twelve month period. Additionally, Agway Energy
offers its customers a budget payment plan, whereby the customer's estimated
annual fuel oil purchases and service contracts are paid for in a series of
estimated equal monthly payments over a twelve month period. Agway Energy
enters into derivative instruments in the form of futures and options traded on
the New York Mercantile Exchange ("NYMEX") covering a substantial majority of
the fuel oil it expects to sell to customers under these price protection plans
in an effort to protect the margins under these programs.
Agway Energy obtains fuel oil in either pipeline or truckload quantities,
and has contracts with certain pipeline and terminal operators for the right to
temporarily store fuel oil at more than 14 terminal facilities it does not own.
Approximately 70% of fuel oil is purchased through annual supply contracts and
the remainder is purchased on the spot market. In most cases, the supply
contracts do not establish the price of fuel oil in advance, rather, prices are
typically established based upon market prices at the time of delivery plus or
minus a differential to market for transportation and volume discounts. Agway
Energy purchases fuel oil from nearly 20 suppliers at more than 95 supply
points.
HVAC
Agway Energy has a fully developed HVAC business, in which they offer a
full range of service to its existing customer base, as well as stand alone
HVAC customers. Agway Energy installs and services all types of whole-house
warm and cool air systems, air cleaners, humidifiers, de-humidifiers, hearth
products, space heaters, room air conditioners and water systems. Services such
as duct cleaning, air balancing and energy audits are also offered. As of
September 30, 2003, Agway Energy had approximately 600 skilled and experienced
service technicians to support the HVAC business unit. Agway Energy has
recently consolidated its supplier relationships to three main equipment
manufacturers. Agway Energy's supply needs are filled through supply
arrangements with several distribution companies, primarily with a just-in-time
inventory philosophy, thus eliminating the need for large quantities of
inventory on hand. Inventory and billing arrangements are controlled through
information technology implemented on hand-held monitoring systems for each
service technician.
OTHER ENERGY
In its other energy business unit, Agway Energy markets natural gas and
electricity in the deregulated markets of New York and Pennsylvania. This
business has evolved as a result of demand from existing customers seeking an
alternative source of natural gas and/or electricity. Agway Energy purchases
all of its natural gas and electricity under supply contracts that are matched
with customer requirements on a one-for-one basis, thus effectively eliminating
commodity risk. As of September 30, 2003, Agway Energy was serving over 70,000
natural gas and electricity customers in New York and Pennsylvania.
ENVIRONMENTAL MATTERS
Agway Energy is subject to various environmental, health and safety laws
and regulations that govern its operations, including those relating to
emissions and discharges into the environment, the handling and disposal of
hazardous and nonhazardous materials and wastes, the transportation of
hazardous materials, employee health and safety, and those that impose
liability and remediation
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responsibility for releases of hazardous materials into the environment and
natural resource damages. From time to time, Agway Energy has incurred and,
following the Acquisition, we will continue to incur costs and obligations
related to environmental compliance matters. Failure to comply with such laws
and regulations could result in penalties, the curtailment or cessation of
operations, or other sanctions.
Under certain of these laws and regulations, a current or previous owner
or operator of property may be liable for the costs of investigating and
remediating contaminated soil or groundwater on or from its property without
regard to whether it knew of, or caused, the contamination, and may incur
liability to third parties impacted by such contamination. Actual or potential
contamination associated with current or former operations has been, and in the
future may be, identified at a number of Agway Energy properties to be acquired
and will be investigated and remediated by us as required. These matters are in
various stages of investigation and may result in material costs. Although we
are entitled to payment from an environmental indemnity escrow fund established
prior to the closing of the Acquisition in an amount up to $15.0 million should
we incur certain environmental liabilities as a result of the Acquisition, we
cannot assure you that environmental costs associated with the Acquisition will
not exceed $15.0 million.
We believe that any costs we may incur relating to environmental matters
associated with the Acquisition, including remediation costs, will not
adversely affect us. We cannot be certain, however, that identification of
currently unknown environmental conditions, more vigorous enforcement by
regulatory agencies, enactment of more stringent laws and regulations, or other
unanticipated events in the future will not give rise to additional material
environmental liabilities which could have a material adverse effect on our
business, financial condition or results of operations.
SUMMARY OF SIGNIFICANT TERMS OF THE ACQUISITION
Agway Energy is comprised of three wholly-owned subsidiaries of Agway,
Inc., which is presently a debtor-in-possession under Chapter 11 of the
Bankruptcy Code in a bankruptcy proceeding pending before the United States
Bankruptcy Court for the Northern District of New York (the "Bankruptcy
Court"). Agway Energy is not a Chapter 11 debtor. The Purchase Agreement was
filed with the Bankruptcy Court and is incorporated by reference into this
prospectus supplement and accompanying prospectus. On November 24, 2003, the
Bankruptcy Court approved Agway, Inc.'s motion to establish bid procedures for
the sale. Under the Bankruptcy Court order, we were officially designated the
"stalking horse," or lead bidder, in a process in which additional bids for the
Agway Energy assets and business operations are being solicited for a specified
period of time. An auction is currently scheduled for December 18, 2003. If we
are the successful bidder at the auction, the closing of the Acquisition is
expected to occur shortly following the conclusion of the auction process and
upon receipt of necessary regulatory approvals. There can be no assurance that
Suburban will ultimately be the successful bidder at the auction or will be
able to consummate the Acquisition. We intend to finance the Acquisition
through this offering and a concurrent private placement of senior notes. This
offering is not contingent on the consummation of the Acquisition. In contrast,
although we expect the concurrent private placement of senior notes to close at
the time we close the Acquisition, we will not receive the proceeds from that
offering if the Acquisition does not close by a specified date.
Pursuant to the Purchase Agreement, we intend to acquire substantially all
of the assets and operations of Agway Energy for the purchase price of $206.0
million, subject to certain post-closing adjustments. We will be assuming only
specified liabilities, including those liabilities arising under or with
respect to assigned contracts, customer deposits, deferred revenue, accounts
payable incurred in the ordinary course, 50% of any sales or transfer taxes
resulting from the Acquisition and certain liabilities for employee matters.
All liabilities not expressly assumed remain with Agway, Inc. The purchase
price will be increased or decreased for a post-closing adjustment for minimum
net working capital (as defined in the Purchase Agreement) based on the
difference between actual net working capital on the closing date of the
Acquisition and the required minimum net working capital of $33.7 million set
forth in the Purchase Agreement. Additionally, the purchase price may be
reduced by an adjustment to the assumed liability for deferred revenue based on
a formula set forth in the Purchase
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Agreement that takes into consideration, among other things, the severity of
the weather during the peak heating season from October 2003 through March
2004.
Under the Purchase Agreement, we and Agway Energy make customary
representations and warranties, including representations and warranties as to
due organization, authorization, third party consents, absence of conflicts,
litigation and financial advisors. Agway Energy makes additional
representations and warranties with respect to its financial statements,
absence of undisclosed liabilities, valid title to the purchased assets,
absence of certain adverse developments, taxes, real property, tangible
personal property, intellectual property, material contracts, employee
benefits, labor, compliance with laws, environmental matters, accounts
receivable, inventory, significant suppliers, insurance and absence of certain
business practices.
The representations and warranties in the Purchase Agreement will survive
for 15 months after closing of the Acquisition, except for Agway Energy's
representations and warranties relating to tax and environmental matters which
will survive for three years. Agway Energy will indemnify us up to $4.0 million
for breaches of representations and warranties (other than with respect to
environmental claims), but only after such claims exceed $1.0 million. Pursuant
to the Purchase Agreement we are entitled to payment from an environmental
indemnity escrow fund established prior to the closing of the Acquisition in an
amount up to $15.0 million should we incur certain environmental liabilities as
a result of the Acquisition. Further, Agway Energy will indemnify us for 15
months after the closing of the Acquisition, in an unlimited amount, for any
losses we suffer resulting from matters related to (i) breaches of Agway
Energy's covenants, (ii) the excluded liabilities, (iii) income, sales, use,
excise and other taxes of Agway Energy and (iv) pre-closing breaches of
contracts assigned to us.
Not later than 10 days prior to the closing of the Acquisition, we will
determine which employees of Agway Energy to offer employment. Each offer of
employment will be at the same salary or hourly wage as was in effect
immediately prior to the Acquisition. Any person who accepts such offer of
employment will be provided with benefits substantially similar to those
provided to our similarly situated employees and the time spent working for
Agway Energy will be credited to them for purposes of eligibility.
The Acquisition is subject to approval by the Bankruptcy Court and certain
customary closing conditions, including anti-trust and other necessary
regulatory approvals. In addition, either party may terminate the Purchase
Agreement if there is a final nonappealable order of a governmental body
preventing the intended transaction or if Agway Energy accepts, or the
Bankruptcy Court approves, an alternative transaction as a result of the
auction process. If such alternative transaction is consummated, we would be
entitled to a fee of $5.0 million. We would also be entitled to an expense
reimbursement payment of up to $3.675 million if Agway Energy selects a
different purchaser as a result of the auction process or if a material breach
of the Purchase Agreement by Agway Energy results in its termination.
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MANAGEMENT
Our business is managed by a Board of Supervisors, consisting of three
persons who are elected by the unitholders and two persons designated by our
general partner. Each elected member of the Board of Supervisors serves for a
term of three years and was reelected at our 2003 tri-annual meeting held on
April 23, 2003.
The following table sets forth information with respect to our Board of
Supervisors and executive officers as of December 1, 2003:
NAME AGE POSITION
---------------------- ----- --------------------------------------------------------------
Mark A. Alexander 45 President and Chief Executive Officer; Member of the Board of
Supervisors (Appointed Supervisor)
Michael J. Dunn, Jr. 54 Senior Vice President--Corporate Development; Member of the
Board of Supervisors (Appointed Supervisor)
David R. Eastin 45 Senior Vice President and Chief Operating Officer
Robert M. Plante 55 Vice President and Chief Financial Officer
Jeffrey S. Jolly 51 Vice President and Chief Information Officer
Michael M. Keating 50 Vice President--Human Resources and Administration
Janice G. Meola 37 Vice President, General Counsel and Secretary
A. Davin D'Ambrosio 39 Treasurer
Michael A. Stivala 34 Controller
John Hoyt Stookey 73 Member of the Board of Supervisors (Chairman and Elected
Supervisor)
Harold R. Logan, Jr. 59 Member of the Board of Supervisors (Elected Supervisor)
Dudley C. Mecum 68 Member of the Board of Supervisors (Elected Supervisor)
Mark J. Anton 77 Supervisor Emeritus
Mr. Alexander has served as President and Chief Executive Officer since
October 1996 and as an Appointed Supervisor since March 1996. He was Executive
Vice Chairman and Chief Executive Officer from March through October 1996. From
1989 until joining Suburban, Mr. Alexander was an officer of Hanson Industries
(the United States management division of Hanson plc), most recently Senior
Vice President--Corporate Department. Mr. Alexander serves as Chairman of the
Board of Managers of our general partner. He is a member of the Executive
Committee of the National Propane Gas Association.
Mr. Dunn has served as Senior Vice President since June 1998 and became
Senior Vice President--Corporate Development in November 2002. Mr. Dunn has
served as an Appointed Supervisor since July 1998. He was Vice
President--Procurement and Logistics from March 1997 until June 1998. From 1983
until joining Suburban, Mr. Dunn was Vice President of Commodity Trading for
the investment banking firm of Goldman Sachs & Company. Mr. Dunn serves on the
Board of Managers of our general partner.
Mr. Eastin has served as Chief Operating Officer since May 1999 and became
a Senior Vice President in November 2000. From 1992 until joining us, Mr.
Eastin held various executive positions with Star Gas Propane LP, most recently
as Vice President--Operations. Mr. Eastin serves on the Board of Managers of
our general partner.
Mr. Plante has served as a Vice President since October 1999 and became
Vice President and Chief Financial Officer in November 2003. Mr. Plante served
as Vice President--Finance from March 2001 until November 2003 and Treasurer
from March 1996 through October 2002. Mr. Plante held various financial and
managerial positions with predecessors of our operating partnership from 1977
until 1996.
Mr. Jolly has served as Vice President and Chief Information Officer since
May 1999. He was Vice President--Information Services from July 1997 until May
1999. From May 1993 until joining us, Mr. Jolly was Vice President--Information
Systems at The Wood Company, a food services company.
S-42
Mr. Keating has served as Vice President--Human Resources and
Administration since July 1996. He previously held senior human resource
positions at Hanson Industries and Quantum Chemical Corporation ("Quantum"), a
predecessor of our operating partnership.
Ms. Meola has served as our Vice President, General Counsel and Secretary
since November 2003. From May 1999 until November 2003, Ms. Meola served as
General Counsel and Secretary. She was Counsel from July 1998 to May 1999 and
Associate Counsel from September 1996, when she joined us, until July 1998.
Mr. D'Ambrosio became Treasurer in November 2002. He served as Assistant
Treasurer from October 2000 to November 2002 and as Director of Treasury
Services from January 1998 to October 2000. Mr. D'Ambrosio joined us in May
1996 after ten years in the commercial banking industry.
Mr. Stivala has served as Controller since December 2001. From 1991 until
joining us, he held several positions with PricewaterhouseCoopers LLP, most
recently as Senior Manager in the Assurance practice. Mr. Stivala is a
Certified Public Accountant and a member of the American Institute of Certified
Public Accountants.
Mr. Stookey has served as an Elected Supervisor and Chairman of the Board
of Supervisors since March 1996. From 1986 until September 1993, he was the
Chairman, President and Chief Executive Officer of Quantum and served as
non-executive Chairman and a Director of Quantum from its acquisition by Hanson
PLC in September 1993 until October 1995. Mr. Stookey is a non-executive
Chairman of Per Scholas Inc.
Mr. Logan has served as an Elected Supervisor since March 1996. He is a
Director and Chairman of the Finance Committee of the Board of Directors of
TransMontaigne Inc., which provides logistical services (i.e., pipeline,
terminaling and marketing) to producers and end-users of refined petroleum
products. From 1995 to 2002, Mr. Logan was Executive Vice President/Finance,
Treasurer and a Director of TransMontaigne Inc. From 1987 to 1995, Mr. Logan
served as Senior Vice President of Finance and a Director of Associated Natural
Gas Corporation, as independent gatherer and marketer of natural gas, natural
gas liquids and crude oil. Mr. Logan is also a Director of The Houston
Exploration Company, Graphic Packaging, Inc. and Rivington Capital Advisors,
LLC.
Mr. Mecum has served as an Elected Supervisor since June 1996. He has been
a Managing Director of Capricorn Holdings, LLC (a sponsor of and investor in
leveraged buyouts) since June 1997. Mr. Mecum was a partner of G.L. Ohrstrom &
Co. (a sponsor of and investor in leveraged buyouts) from 1989 to June 1996.
Mr. Mecum is a Director of Lyondell Chemical Co., Dyncorp., CitiGroup and Mrs.
Fields Famous Brands, Inc.
Mr. Anton has served as Supervisor Emeritus of the Board of Supervisors
since January 1999. He is a former President, Chief Executive Officer and
Chairman of the Board of Directors of Suburban Propane Gas Corporation, a
predecessor of Suburban, and a former Executive Vice President of Quantum.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
AMENDED AND RESTATED CREDIT AGREEMENT
On May 8, 2003, our operating partnership entered into the Second Amended
and Restated Credit Agreement which provides a $75.0 million revolving facility
and a $25.0 million acquisition facility. Under the revolving facility, up to
$7.5 million may be borrowed under a "swingline" facility on same-day notice to
the lenders. The entire outstanding principal amount under the credit agreement
is due on May 31, 2006. As of September 27, 2003, we had no borrowings under
the credit agreement.
In general, borrowings under the credit agreement bear interest, at our
option, at either:
o the base rate (as defined below) plus a margin ranging from 0.25% to
1.0% per annum depending on our operating partnership's leverage
ratio; or
o the libor rate (as defined below) plus a margin ranging from 1.25% to
2.0% per annum depending on our operating partnership's leverage
ratio.
The base rate is the higher of the lender's prime rate or the federal
funds rate plus 0.5%. The libor rate is defined as the rate per annum obtained
by dividing (1) the rate at which deposits in dollars for the applicable
interest period are quoted on the Telerate Page Screen 3750 by (2) a percentage
equal to 100% minus the maximum reserve requirement stated by the Federal
Reserve Board in respect of "Eurocurrency liabilities" for a member bank of the
Federal Reserve System. If an event of default has occurred and is continuing
under the credit agreement, all amounts due will bear interest at an additional
rate of 2% per annum.
An annual fee ranging from 0.375% to 0.5% of the aggregate commitment,
depending on our operating partnership's leverage ratio, is payable quarterly
whether or not borrowings occur.
The credit agreement requires our operating partnership to comply with
certain financial covenants and ratios, including a total leverage ratio and an
interest coverage ratio. The credit agreement also contains negative covenants
that restrict the ability of our operating partnership and its subsidiaries to:
o incur additional debt;
o create liens on assets;
o engage in sale and leaseback transactions;
o make investments, loans or advances;
o engage in mergers or consolidations;
o dispose of assets;
o make acquisitions;
o pay dividends or make other restricted payments;
o engage in transactions with affiliates; or
o engage in other businesses.
The credit agreement specifies certain customary events of default,
including non-payment of principal, interest or other obligations, inaccuracy
of representations and warranties, violation of certain covenants, defaults
under other debt or material agreements, change of control, certain events of
bankruptcy or insolvency, ERISA defaults and the entering of material
judgments.
7.54% SENIOR NOTES
On February 28, 1996, our operating partnership entered into the note
agreement and issued $425.0 million of its 7.54% Senior Notes due June 30,
2011. The note agreement requires interest to be paid semiannually and
principal to be paid in an equal annual amount of $42.5 million, starting June
30, 2002. The obligations under the note agreement are general senior unsecured
obligations of our operating partnership.
The note agreement requires our operating partnership to comply with
certain financial covenants and ratios, including a total leverage ratio and an
interest coverage ratio. The note agreement also contains negative covenants
that restrict the ability of our operating partnership and its subsidiaries to:
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o incur additional debt;
o create liens on assets;
o incur additional debt that is effectively senior to the 7.54% notes;
o make loans, advances or investments;
o pay dividends or make other restricted payments;
o engage in mergers or consolidations;
o dispose of assets;
o engage in other businesses;
o engage in transactions with affiliates;
o issue or sell equity interests of its subsidiaries; and
o engage in receivable sales.
The note agreement specifies certain customary events of default,
including non-payment of principal or interest, defaults under other debt
agreements, inaccuracy of representations and warranties, violation of certain
covenants, certain events of bankruptcy or insolvency, the entering of material
judgments, ERISA defaults and change of control.
7.37% SENIOR NOTES
On April 19, 2002, our operating partnership entered into the note
purchase agreement and issued $42.5 million of its 7.37% Senior Notes due June
30, 2012. The note purchase agreement requires interest to be paid
semiannually. The 7.37% notes are not subject to any sinking fund obligation.
The obligations under the note purchase agreement are general senior unsecured
obligations of our operating partnership.
The note purchase agreement requires our operating partnership to comply
with a total leverage ratio. The note purchase agreement also contains negative
covenants that restrict the ability of our operating partnership and its
subsidiaries to:
o incur additional debt;
o create liens on assets;
o incur additional debt that is effectively senior to the 7.37% notes;
o pay dividends or make other restricted payments;
o engage in mergers or consolidations;
o dispose of assets;
o engage in transactions with affiliates; and
o engage in other businesses.
The note purchase agreement specifies certain customary events of default,
including non-payment of principal, make-whole amount or interest, violation of
certain covenants, inaccuracy of representations and warranties, defaults under
other debt agreements, certain events of bankruptcy or insolvency, the entering
of material judgments and ERISA defaults.
CONCURRENT PRIVATE PLACEMENT OF SENIOR NOTES
We are currently offering $150.0 million of senior notes due 2013 in a
private placement under Rule 144A and/or Regulation S of the Securities Act of
1933, as amended. This offering of common units is not contingent on the
closing of the private placement of senior notes. The private placement of
senior notes is contingent on the consummation of the Acquisition, and the net
proceeds of the senior notes will be placed into escrow until the Acquisition
closes. If the Acquisition does not close, we will redeem the senior notes at
101% of their principal amount, plus accrued and unpaid interest. We expect the
senior notes will be non-redeemable for five years, will pay cash interest and
will contain customary covenants.
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TAX CONSIDERATIONS
FEDERAL INCOME TAX CONSIDERATIONS
This section describes material U.S. federal income tax considerations
that may be relevant to persons who purchase our common units in this offering.
The statements as to matters of federal income tax law and related legal
conclusions contained in this section, unless otherwise noted, reflect the
opinion of Cahill Gordon & Reindel LLP, our counsel. This section is based upon
current provisions of the Internal Revenue Code, existing and proposed
regulations thereunder and current administrative rulings and court decisions,
all of which are subject to change possibly with retroactive effect. Subsequent
changes in such authorities may cause the tax consequences to vary materially
adversely from the consequences described below. As the context otherwise
requires, references in this section to "us" or "we" are references to either
Suburban or the Operating Partnership and not to Cahill Gordon & Reindel LLP.
No attempt has been made in the following discussion to comment on all
federal income tax matters affecting us or the unitholders. Moreover, the
discussion focuses on unitholders who are U.S. persons (i.e., persons who are,
for U.S. federal income tax purposes, individual citizens or residents of the
United States, corporations created or organized in or under the laws of the
United States or any political subdivision thereof, estates the income of which
is subject to U.S. federal income taxation regardless of its source, or trusts
(1) with respect to which a court within the United States is able to exercise
primary supervision over their administration and one or more U.S. persons have
the authority to control all of their substantial decisions or (2) that have a
valid election in effect to be treated as U.S. persons) and has no application
to persons in special tax situations, such as financial institutions, insurance
companies, regulated investment companies, real estate investment trusts,
dealers in securities or currencies, tax-exempt entities, expatriates, foreign
persons, persons holding units in a tax-deferred or tax-advantaged account,
persons holding units as part of a "straddle," "hedge" or "conversion"
transaction with other investments, partnerships or other entities that are
pass-through for U.S. federal income tax purposes or persons who hold their
units through such entities, or persons for whom a unit is not a capital asset.
Furthermore, the discussion assumes that prospective unitholders are not
related to each other or to existing unitholders, either by blood or through
ownership of entities or option attribution, in a manner that would affect the
U.S. federal income tax results to prospective unitholders of owning units.
Accordingly, each prospective unitholder should consult, and should depend on,
his own tax advisor in analyzing the federal, state, local and foreign tax
consequences peculiar to him of the ownership or disposition of common units.
LEGAL OPINIONS
Counsel is of the opinion that, as of the date hereof, assuming the
accuracy of the factual representations and subject to the qualifications set
forth in the detailed discussion that follows, for federal income tax purposes
Suburban and the Operating Partnership will each be treated as a partnership.
We have not requested, and do not expect to request, a ruling from the
Internal Revenue Service (the "IRS") with respect to our classification as a
partnership for federal income tax purposes, whether our propane operations
generate "qualifying income" under Section 7704 of the Internal Revenue Code or
any other matter affecting us or prospective unitholders. Instead, we have
relied, and will rely, on the opinions of counsel as to these matters. An
opinion of counsel represents only that counsel's best legal judgment and does
not bind the IRS or the courts. No assurance can be provided that the opinions
and statements set forth herein would be sustained by a court if contested by
the IRS. Any such contest with the IRS may materially and adversely impact the
market for the common units and the prices at which common units trade even if
we prevail. In addition, the costs of any contest with the IRS will be borne
directly by us, and, indirectly by the unitholders and the general partner,
because the costs incurred by us will reduce the amount of cash available for
distribution on our common units. Furthermore, no assurance can be given that
our treatment, or an investment in Suburban, will not be significantly modified
by future legislative or administrative changes or court decisions. Any such
modification may or may not be retroactively applied.
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Counsel's opinion is limited to matters expressly addressed herein. For
the reasons hereinafter described, counsel has not rendered an opinion with
respect to the following specific federal income tax issues that are discussed
herein:
o the treatment of a unitholder whose common units are loaned to a short
seller to cover a short sale of common units (see "--Tax Treatment of
Operations--Treatment of Short Sales");
o whether a unitholder acquiring common units in separate transactions
must maintain a single aggregate adjusted tax basis in the common
units (see "--Disposition of Common Units--Recognition of Gain or
Loss");
o whether our monthly convention for allocating taxable income and
losses is permitted by existing Treasury Regulations (see
"--Disposition of Common Units--Allocations Between Transferors and
Transferees");
o certain matters relating to the allocation among the partners of our
income, gain, loss and deduction for federal income tax purposes (see
"--Allocation of Partnership Income, Gain, Loss and Deduction"); and
o whether our method for depreciating certain Section 743 adjustments is
sustainable (see "--Tax Treatment of Operations--Section 754 Election"
and "--Uniformity of Common Units").
PARTNERSHIP STATUS
An entity that is treated as a partnership for U.S. federal income tax
purposes is not a taxable entity and incurs no U.S. federal income tax
liability. Instead, each partner is required to take into account its allocable
share of items of income, gain, loss and deduction of the partnership in
computing its U.S. federal income tax liability, regardless of whether cash
distributions are made. Distributions by a partnership to a partner are
generally not taxable unless the amount of cash distributed to a partner is in
excess of the partner's adjusted basis in its partnership interest.
We have not requested, and do not expect to request, any ruling from the
IRS as to the status of Suburban or the Operating Partnership as a partnership
for federal income tax purposes. Instead we have relied on the opinion of
counsel that, based upon the Internal Revenue Code, Treasury Regulations,
published revenue rulings and court decisions and the representations described
below, Suburban and the Operating Partnership will each be classified as a
partnership for federal income tax purposes. If any of these factual
representations are inaccurate in any material respect, counsel's opinion could
differ adversely and materially from that set forth herein.
Section 7704 of the Internal Revenue Code provides that publicly-traded
partnerships will, as a general rule, be taxed as corporations. However, an
exception, referred to as the "Qualifying Income Exception," exists with
respect to publicly-traded partnerships of which 90% or more of the gross
income for every taxable year consists of "qualifying income." Qualifying
income includes interest from other than a financial business, dividends and
income and gains from the processing, transportation and marketing of certain
minerals and natural resources, and certain related hedging activities. Based
upon the representations of Suburban and the general partner and a review of
the applicable legal authorities, counsel is of the opinion that at least 90%
of our gross income constitutes qualifying income. We estimate that
approximately 5% or less of our gross income for calendar year 2002 was not
qualifying income.
If we fail to meet the Qualifying Income Exception, other than a failure
which is determined by the IRS to be inadvertent and which is cured within a
reasonable time after discovery, we will be treated as if we transferred all of
our assets, subject to our liabilities, to a newly formed corporation, on the
first day of the year in which we fail to meet the Qualifying Income Exception,
in return for stock in that corporation, and then distributed that stock to the
partners in liquidation of their interests in us. This contribution and
liquidation should be tax-free to unitholders and Suburban, so long as we, at
that time, do not have liabilities in excess of the tax basis of our assets and
the distribution
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qualifies for certain exceptions relating to the distribution of marketable
securities by partnerships. Thereafter, we would be treated as an association
taxable as a corporation for federal income tax purposes.
If Suburban or the Operating Partnership were treated as an association
taxable as a corporation in any taxable year, either as a result of a failure
to meet the Qualifying Income Exception or otherwise, its items of income,
gain, loss and deduction would be reflected only on its tax return rather than
being passed through to the unitholders, and our net income would be taxed to
Suburban or the Operating Partnership at corporate rates. The imposition of a
corporate income tax on our income could reduce substantially the amount of
cash available to distribute to unitholders. In addition, any distributions we
made to a unitholder would be treated as either taxable dividend income, to the
extent of Suburban's current or accumulated earnings and profits, or, in the
absence of earnings and profits, a nontaxable return of capital, to the extent
of the unitholder's tax basis in his common units, or taxable capital gain,
after the unitholder's tax basis in the common units is reduced to zero.
Accordingly, treatment of either Suburban or the Operating Partnership as an
association taxable as a corporation would result in a material reduction in a
unitholder's cash flow and after-tax return and thus would likely result in a
substantial reduction of the value of the common units.
The discussion below is based on the assumption that we will be classified
as a partnership for U.S. federal income tax purposes.
UNIFORMITY OF COMMON UNITS
Because we cannot match transferors and transferees of common units,
uniformity of the economic and tax characteristics of the common units to a
purchaser of such common units must be maintained. In the absence of
uniformity, compliance with a number of U.S. federal income tax requirements,
both statutory and regulatory, could be substantially diminished. As explained
below, a lack of uniformity might result from the required application of
certain technical provisions, including certain provisions related to Section
743(b) adjustments. Any non-uniformity could affect the fungibility of our
common units from a securities law standpoint, which could have a significant
negative impact on the marketability and value of the common units and the U.S.
federal income tax consequences associated with the common units. We intend to
interpret the foregoing rules in a manner that would preserve the uniformity of
our common units; however, there is no assurance that this would not be
successfully challenged by the IRS and our counsel could not opine on this
issue.
TAX TREATMENT OF UNITHOLDERS
LIMITED PARTNER STATUS
Unitholders who have become limited partners will be treated as our
partners for federal income tax purposes. Unitholders whose common units are
held in street name or by a nominee and who have the right to direct the
nominee in the exercise of all substantive rights attendant to the ownership of
their common units will be treated as our partners for federal income tax
purposes.
Although it is not clear, a beneficial owner of common units whose common
units have been transferred to a short seller to complete a short sale would
appear to lose his status as a partner with respect to such common units for
federal income tax purposes. See "--Tax Treatment of Operations--Treatment of
Short Sales."
Our income, gain, deductions or losses would not appear to be reportable
by a unitholder who is not a partner for federal income tax purposes, and any
cash distributions received by such a unitholder may therefore be fully taxable
as ordinary income. These holders should consult their own tax advisors with
respect to their status as our partners for federal income tax purposes and the
treatment of cash distributions to them.
FLOW-THROUGH OF TAXABLE INCOME
We will not pay any federal income tax. Instead, each unitholder must
report on its income tax return its allocable share of our income, gains,
losses and deductions without regard to whether
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corresponding cash distributions are received by that unitholder. Consequently,
a unitholder may be allocated a share of our income even if it has not received
a corresponding cash distribution. Each unitholder must include in income its
allocable share of our income, gain, loss and deduction for our taxable year
ending with or within his taxable year.
TREATMENT OF PARTNERSHIP DISTRIBUTIONS
Distributions by us to a unitholder generally will not be taxable to the
unitholder for federal income tax purposes to the extent of the tax basis the
unitholder has in the common units immediately before the distribution. Our
cash distributions in excess of a unitholder's tax basis generally will be
considered to be gain from the sale or exchange of the common units, taxable in
accordance with the rules described under "--Disposition of Common Units"
below. Current tax law requires that any reduction in a unitholder's share of
our liabilities for which no partner, including the general partner, bears the
economic risk of loss, known as "nonrecourse liabilities," be treated as a
distribution of cash to that unitholder. Currently, we do not have any
nonrecourse liabilities to allocate to our unitholders and we do not expect to
have any in the future. To the extent that our distributions cause a
unitholder's "at risk" amount to be less than zero at the end of any taxable
year, the unitholder must recapture any losses deducted in previous years. See
"--Tax Treatment of Unitholders--Limitations on Deductibility of Partnership
Losses."
A decrease in a unitholder's percentage interest in us because of our
issuance of additional common units will decrease such unitholder's share of
nonrecourse liabilities, if any, and thus will result in a corresponding deemed
distribution of cash. A non-pro rata distribution of money or property may
result in ordinary income to a unitholder, regardless of the unitholder's tax
basis in the common units, if such distribution reduces the unitholder's share
of our "unrealized receivables," including depreciation recapture, and/or
substantially appreciated "inventory items," both as defined in Section 751 of
the Internal Revenue Code, and collectively, "Section 751 Assets." To that
extent, the unitholder will be treated as having been distributed part of its
proportionate share of the Section 751 Assets and having exchanged such assets
with us in return for the non-pro rata portion of the actual distribution made
to the unitholder. This latter deemed exchange will generally result in the
unitholder's realization of ordinary income under Section 751(b) of the
Internal Revenue Code. Such income will equal the excess of (1) the non-pro
rata portion of such distribution over (2) the unitholder's tax basis for the
share of such Section 751 Assets deemed relinquished in the exchange.
ALTERNATIVE MINIMUM TAX
Each unitholder will be required to take into account his distributive
share of any of our items of income, gain, deduction or loss, including any
items of tax preference, for purposes of the alternative minimum tax. A portion
of our depreciation deductions will be treated as an item of tax preference for
this purpose. A unitholder's alternative minimum taxable income derived from us
will be higher than his share of our net income because we will use accelerated
methods of depreciation for purposes of computing federal taxable income or
loss. The alternative minimum tax rate for noncorporate taxpayers is 26% on the
first $175,000 of alternative minimum taxable income in excess of the exemption
amount and 28% on any additional alternative minimum taxable income.
Prospective unitholders should consult with their tax advisors as to the impact
of an investment in common units on their liability for the alternative minimum
tax.
BASIS OF COMMON UNITS
A unitholder will have an initial tax basis in the common units equal to
the amount paid for the common units plus the unitholder's share of our
nonrecourse liabilities, if any. That basis will be increased by the
unitholder's share of our income and by any increases in the unitholder's share
of our nonrecourse liabilities, if any. That basis will be decreased, but not
below zero, by distributions from us, by the unitholder's share of our losses,
by any decrease in the unitholder's share of our nonrecourse liabilities, if
any, and by the unitholder's share of our expenditures that are not deductible
in computing our taxable income and are not properly chargeable to capital
account. A
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unitholder will have no share of our debt which is recourse to the general
partner, but will have a share, generally based on its share of profits, of our
nonrecourse liabilities. Currently, we do not have any nonrecourse liabilities
to allocate to our unitholders and we do not expect to have any in the future.
See "--Disposition of Common Units--Recognition of Gain or Loss."
LIMITATIONS ON DEDUCTIBILITY OF PARTNERSHIP LOSSES
The deduction by a unitholder of its share of our losses will be limited
to its tax basis in the common units and, in the case of an individual
unitholder or a corporate unitholder, if more than 50% of the value of its
stock is owned directly or indirectly by five or fewer individuals or certain
tax-exempt organizations, to the amount for which the unitholder is considered
to be "at risk" with respect to our activities, if that is less than the
unitholder's tax basis. Losses disallowed to a unitholder or recaptured as a
result of these limitations will carry forward and will be allowable to the
extent that the unitholder's tax basis or at risk amount, whichever is the
limiting factor, subsequently increases. Upon the taxable disposition of a
common unit, any gain recognized by a unitholder can be offset by losses that
were previously suspended by the at risk limitation but may not be offset by
losses suspended by the basis limitation. Any excess loss above such gain
previously suspended by the at risk or basis limitation is no longer
utilizable.
In general, a unitholder will be at risk to the extent of its tax basis in
the common units, excluding any portion of that basis attributable to its share
of our nonrecourse liabilities, reduced by any amount of money the unitholder
borrows to acquire or hold the common units if the lender of such borrowed
funds owns an interest in us, is related to the unitholder or can look only to
common units for repayment. A unitholder's at risk amount will increase or
decrease as the tax basis of the unitholder's common units increases or
decreases, other than increases or decreases in tax basis attributable to
increases or decreases in the unitholder's share of our nonrecourse
liabilities, if any.
The passive loss limitations generally provide that individuals, estates,
trusts and certain closely held corporations and personal service corporations
can deduct losses from passive activities, generally, activities in which the
taxpayer does not materially participate, only to the extent of the taxpayer's
income from those passive activities. The passive loss limitations are applied
separately with respect to each publicly traded partnership. Consequently, any
passive losses we generate will only be available to offset future passive
activity income generated by us and will not be available to offset income from
other passive activities or investments, including other publicly traded
partnerships or investment income generated by us, or salary or active business
income. Passive losses which are not deductible because they exceed a
unitholder's share of our income may be deducted in full upon disposition of
the entire investment in us in a fully taxable transaction to an unrelated
party. The passive activity loss rules are applied after other applicable
limitations on deductions such as the at risk rules and the basis limitation.
LIMITATIONS ON INTEREST DEDUCTIONS
The deductibility of a noncorporate taxpayer's "investment interest
expense" is generally limited to the amount of such taxpayer's "net investment
income." Investment interest expense includes:
o interest on indebtedness properly allocable to property held for
investment;
o our interest expense attributable to portfolio income; and
o the portion of interest expense incurred to purchase or carry an
interest in a passive activity to the extent attributable to portfolio
income.
The computation of a unitholder's investment interest expense will take
into account interest on any margin account borrowing or other loan incurred to
purchase or carry a common unit. Net investment income includes gross income
from property held for investment, including gross income treated as passive
income, and amounts treated as portfolio income pursuant to the passive loss
rules less deductible expenses, other than interest, directly connected with
the production of investment income, but generally does not include gains
attributable to the disposition of property held for investment or qualified
dividend income unless the unitholder waives the benefit of the lower tax rates
on such amounts.
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ALLOCATION OF PARTNERSHIP INCOME, GAIN, LOSS AND DEDUCTION
In general, if we have a net profit, our items of income, gain, loss and
deduction are allocated among the general partner and the unitholders in
accordance with their respective percentage interests in us. At any time that
distributions are made to the holders of incentive distribution rights, gross
income is allocated to the recipients to the extent of such distributions.
There can be no assurances under the Treasury Regulations that such allocations
with respect to the incentive distribution rights will be respected, in which
case a unitholder may be allocated additional income, possibly without a
corresponding allocation of a deduction for the payment to the holder of the
incentive distribution right. In addition, in the event of the conversion of
the incentive distribution rights into common units, we intend to take the
position that additional taxable income will not be allocated to the existing
common unitholders. There can be no assurance, however, that the IRS will not
challenge such position. Accordingly, each prospective unitholder should
consult its tax advisor regarding the tax consequences caused by the existence
of the incentive distribution rights. If we have a net loss, our items of
income, gain, loss and deduction are generally allocated, first, to the general
partner and the unitholders in accordance with their respective percentage
interests to the extent of their positive capital accounts, as maintained under
the partnership agreement, and, second, to the general partner.
As required by Section 704(c) of the Internal Revenue Code and as
permitted by the Treasury Regulations, certain items of our income, deduction,
gain and loss are allocated to account for the difference between the tax basis
and fair market value of property contributed or deemed contributed to us by
each of our partners, referred to in this discussion as "Contributed Property,"
and to account for the difference between the fair market value of our assets
and their carrying value on our books at the time of any offering made pursuant
to this prospectus supplement and the accompanying prospectus. The effect of
these allocations to a unitholder purchasing common units pursuant to this
prospectus supplement and the accompanying prospectus will be essentially the
same as if the tax basis of our assets were equal to their fair market value at
the time of purchase. In addition, certain items of recapture income are
allocated to the extent possible to the partner allocated the deduction or
curative allocation giving rise to the treatment of such gain as recapture
income in order to minimize the recognition of ordinary income by some
unitholders. Finally, although we do not expect that our operations will result
in the creation of negative capital accounts, if negative capital accounts
nevertheless result, items of our income and gain will be allocated in an
amount and manner sufficient to eliminate the negative balance as quickly as
possible.
The Treasury Regulations provide that an allocation of items of
partnership income, gain, loss or deduction, other than an allocation required
by Section 704(c) of the Internal Revenue Code to eliminate the difference
between a partner's "book" capital account, credited with the fair market value
of Contributed Property, and "tax" capital account, credited with the tax basis
of Contributed Property (the "Book-Tax Disparity"), will generally be given
effect for federal income tax purposes in determining a partner's distributive
share of an item of income, gain, loss or deduction only if the allocation has
substantial economic effect. In any other case, a partner's distributive share
of an item will be determined on the basis of the partner's interest in the
partnership, which will be determined by taking into account all the facts and
circumstances, including the partners' relative contributions to the
partnership, the interests of the partners in economic profits and losses, the
interest of the partners in cash flow and other nonliquidating distributions
and rights of the partners to distributions of capital upon liquidation.
Under the Internal Revenue Code, the partners in a partnership cannot be
allocated more depreciation, gain or loss than the total amount of any such
item recognized by that partnership in a particular taxable period (the
"ceiling limitation"). As allowed by the Treasury Regulations, to the extent
that the ceiling limitation is or becomes applicable, we will allocate certain
items of income and deduction in a way designed to effectively solve this
problem and eliminate the impact of the ceiling limitation. Although these
allocations will not have substantial economic effect because they will not be
reflected in the capital accounts of the unitholders, they, nevertheless,
generally should be respected under the Treasury Regulations.
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Except with respect to the allocations discussed in the remainder of this
paragraph, these allocations should be respected for federal income tax
purposes. However, because there are uncertainties in the Treasury Regulations
relating to the allocation of partnership income and because certain of the
allocations that may be made under our partnership agreements will be
determined by the Board of Supervisors or the general partner in their
discretion, there can be no assurance that all of the allocations under our
partnership agreement will be given effect for federal income tax purposes in
determining a partner's distributive share of an item of income, gain, loss or
deduction. See for example, the discussion in (1) this section regarding
allocations attributable to incentive distribution rights, (2) "--Tax Treatment
of Operations--Section 754 Election," (3) "--Disposition of Common
Units--Allocations Between Transferors and Transferees," and (4) "--Uniformity
of Common Units." However, no reallocation could be made arbitrarily by the
Internal Revenue Service. In such circumstances, a partner's distributive share
of our income, gain, loss or deduction will be determined on the basis of the
partner's interest in the partnership, which will be determined by taking into
account all the facts and circumstances, including the partners' relative
contributions to the partnership, the interests of the partners in economic
profits and losses, the interest of the partners in cash flow and other
nonliquidating distributions and rights of the partners to distributions of
capital upon liquidation.
TAX TREATMENT OF OPERATIONS
ACCOUNTING METHOD AND TAXABLE YEAR
We currently use the year ending December 31 as our taxable year and we
have adopted the accrual method of accounting for federal income tax purposes.
Each unitholder will be required to include in income its allocable share of
our income, gain, loss and deduction for our taxable year ending within or with
its taxable year. In addition, any unitholder who has a taxable year ending on
a date other than December 31 who disposes of all of its units following the
close of our taxable year but before the close of the unitholder's taxable year
must include the allocable share of our income, gain, loss and deduction for
that taxable year. Therefore, the unitholder's income for the taxable year may
include its allocable share of more than one year of our income.
TAX BASIS, DEPRECIATION AND AMORTIZATION
We use the tax basis of our various assets for purposes of computing
depreciation and cost recovery deductions and, ultimately, gain or loss on the
disposition of such assets. The federal income tax burden associated with the
difference between the fair market value of our property and its tax basis
immediately prior to this offering will be borne by partners holding interests
in us prior to this offering. See "--Allocation of Partnership Income, Gain,
Loss and Deduction."
If we dispose of depreciable property by sale, foreclosure, or otherwise,
all or a portion of any gain, determined by reference to the amount of
depreciation previously deducted and the nature of the property, may be subject
to the recapture rules and taxed as ordinary income rather than capital gain.
Similarly, a partner who has taken cost recovery or depreciation deductions
with respect to property owned by us may be required to recapture such
deductions as ordinary income upon a sale of his interest in us. See
"--Allocation of Partnership Income, Gain, Loss and Deduction" and
"--Disposition of Common Units--Recognition of Gain or Loss."
The costs incurred in promoting the issuance of common units (i.e.,
syndication expenses) must be capitalized and cannot be deducted currently,
ratably, or upon our termination. Uncertainties exist regarding the
classification of costs as organization expenses, which may be amortized, and
as syndication expenses, which may not be amortized.
SECTION 754 ELECTION
We have made the election permitted by Section 754 of the Internal Revenue
Code. This election is irrevocable without the consent of the IRS. The election
generally permits us to adjust a common unit purchaser's tax basis in our
assets ("inside basis") pursuant to Section 743(b) of the
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Internal Revenue Code to reflect his purchase price. This election does not
apply to a person who purchases units directly from us. The Section 743(b)
adjustment belongs to the purchaser and not to other partners. For purposes of
this discussion, a partner's inside basis in our assets will be considered to
have two components: (1) its share of our tax basis in such assets ("common
basis") and (2) its Section 743(b) adjustment to that basis. The amount of the
adjustment under Section 743(b) is equal to the difference between the
purchaser's initial adjusted federal income tax basis in the units purchased
and the share of our common basis attributable to those units. The Section
743(b) adjustment attempts to provide the purchaser with the equivalent of an
adjusted tax basis in its share of our assets equal to the fair market value of
such share.
Treasury Regulations under Section 743 of the Internal Revenue Code
require a partnership that adopts the remedial allocation method (which we have
done) to depreciate the portion of the Section 743(b) increase with respect to
recovery property that is attributable to Section 704(c) built-in gain over the
remaining cost recovery period for the Section 704(c) built-in gain. Any
remaining portion of the Section 743(b) adjustment is recovered as if it were
newly-purchased recovery property placed in service when the purchaser
purchased his partnership interest. The recovery allowance for the purchaser's
share of common basis is unaffected by the Section 743(b) adjustment.
Under Treasury Regulation Section 1.167(c)-1(a)(6), a Section 743(b)
adjustment attributable to property subject to depreciation under Section 167
of the Internal Revenue Code rather than cost recovery deductions under Section
168 of the Internal Revenue Code is generally required to be depreciated using
the straight-line method.
Pursuant to our partnership agreement, we have adopted a convention to
preserve the uniformity of common units even if such convention is not
consistent with certain Treasury Regulations. See "--Uniformity of Common
Units." Although counsel is unable to opine as to the validity of this method,
we intend to depreciate the portion of a Section 743(b) adjustment attributable
to unrealized appreciation in the value of contributed property, to the extent
of any unamortized Book-Tax Disparity, using a rate of depreciation or
amortization derived from the depreciation or amortization method and useful
life applied to the common basis of such property. This method may be
inconsistent with the regulations under Section 743 and, in certain instances
with Treasury Regulation Section 1.167(c)-1(a)(6) (which is not expected to
directly apply to a material portion of our assets). To the extent such Section
743(b) adjustment is attributable to appreciation in value in excess of the
unamortized Book-Tax Disparity, we will apply the rules described in the
Treasury Regulations under Section 743. If we determine in the future that this
position cannot reasonably be taken, we may adopt a depreciation or
amortization convention under which all purchasers acquiring common units in
the same month would receive depreciation or amortization, whether attributable
to common basis or Section 743(b) adjustment, based upon the same applicable
rate as if they had purchased a direct interest in our assets. Such an
aggregate approach may result in lower annual depreciation or amortization
deductions than would otherwise be allowable to certain unitholders and risk
the loss of depreciation and amortization deductions not taken in the year that
such deductions are otherwise allowable. This convention will not be adopted if
we determine that the loss of depreciation and amortization deductions will
have a material adverse effect on the unitholders. If we choose not to utilize
this aggregate method, we may use any other reasonable depreciation and
amortization convention to preserve the uniformity of the intrinsic tax
characteristics of any common units that would not have a material adverse
effect on the unitholders. The IRS may challenge any method of depreciating the
Section 743(b) adjustment described in this paragraph. If such a challenge were
sustained, the uniformity of common units might be affected, and the gain from
the sale of common units might be increased without the benefit of additional
deductions. See "--Uniformity of Common Units."
The allocation of the Section 743(b) adjustment among items of partnership
property must be made in accordance with the Internal Revenue Code and the
Treasury Regulations thereunder. The IRS may seek to reallocate some or all of
any Section 743 (b) adjustment not so allocated by us to goodwill or any real
estate owned by us. Goodwill, as an intangible asset, and real estate would be
amortizable over longer periods of time than our tangible personal property
would be.
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A Section 754 election is advantageous if the transferee's tax basis in
his common units is higher than such common units' share of our common basis
immediately prior to the transfer. In such a case, as a result of the election,
the transferee would have a higher tax basis in his share of our assets for
purposes of calculating, among other items, his depreciation deductions and his
share of any gain or loss on a sale of our assets. Conversely, a Section 754
election is disadvantageous if the transferee's tax basis in his common units
is lower than such common units' share of our common basis immediately prior to
the transfer. Thus, the fair market value of the common units may be affected
either favorably or adversely by the election.
The calculations involved in the Section 754 election are complex and are
made by us on the basis of certain assumptions as to the value of our assets
and other matters. There is no assurance that the determinations made by us
will not be successfully challenged by the IRS and that the deductions
resulting from them will not be reduced or disallowed altogether. Should the
IRS require a different basis adjustment to be made, and should, in our
opinion, the expense of compliance exceed the benefit of the election, we may
seek permission from the IRS to revoke our Section 754 election. If such
permission is granted, a subsequent purchaser of common units may be allocated
more income than he would have been allocated had the election not been
revoked.
VALUATION OF PARTNERSHIP PROPERTY AND BASIS OF PROPERTIES
The federal income tax consequences of the ownership and disposition of
common units will depend in part on our estimates as to the relative fair
market values, and determinations of the initial tax bases, of our assets.
Although we may from time to time consult with professional appraisers with
respect to valuation matters, we will make many of the relative fair market
value estimates. These estimates and determinations of basis are subject to
challenge and will not be binding on the IRS or the courts. If the estimates of
fair market value or determinations of basis are subsequently found to be
incorrect, the character and amount of items of income, gain, loss or
deductions previously reported by unitholders might change, and unitholders
might be required to adjust their tax liability for prior years.
ENTITY-LEVEL COLLECTIONS
If we are required or elect under applicable law to pay any federal, state
or local income tax on behalf of any unitholder or the general partner or any
former unitholder, we are authorized to pay those taxes from our funds. Such
payment, if made, will be treated as a distribution of cash to the unitholder
on whose behalf the payment was made. If the payment is made on behalf of a
person whose identity cannot be determined, we are authorized to treat the
payment as a distribution to current unitholders. We are authorized to amend
our partnership agreement in the manner necessary to maintain uniformity of
intrinsic tax characteristics of common units and to adjust subsequent
distribution so that after giving effect to such distributions, the priority
and characterization of distributions otherwise applicable under our
partnership agreement are maintained as nearly as is practicable. Payments by
us as described above could give rise to an overpayment of tax on behalf of an
individual partner, in which event the partner could file a claim for credit or
refund.
TREATMENT OF SHORT SALES
A unitholder whose common units are loaned to a "short seller" to cover a
short sale of common units may be considered as having disposed of ownership of
those common units. If so, he would no longer be a partner with respect to
those common units during the period of the loan and may recognize gain or loss
from the disposition. As a result, during this period, any of our income, gain,
deduction or loss with respect to those common units would not be reportable by
the unitholder, any cash distributions received by the unitholder with respect
to those common units would be fully taxable and all of such distributions
would appear to be treated as ordinary income. Unitholders desiring to assure
their status as partners and avoid the risk of gain recognition should modify
any applicable brokerage account agreements to prohibit their brokers from
borrowing their common units. See also "--Disposition of Common
Units--Recognition of Gain or Loss."
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DISPOSITION OF COMMON UNITS
RECOGNITION OF GAIN OR LOSS
A unitholder will recognize gain or loss on a sale of common units equal
to the difference between the amount realized and the unitholder's tax basis
for the common units sold. A unitholder's amount realized will be measured by
the sum of the cash or the fair market value of other property received plus
his share of our nonrecourse liabilities. Because the amount realized includes
a unitholder's share of our nonrecourse liabilities, the gain recognized on the
sale of common units could result in a tax liability in excess of any cash
received from such sale. Currently, we do not have any nonrecourse liabilities
to allocate to our unitholders and we do not expect to have any in the future.
Prior distributions from us in excess of cumulative net taxable income
allocated to a common unit which decreased a unitholder's tax basis in such
common unit will, in effect, become taxable income if the common unit is sold
at a price greater than the unitholder's tax basis in such common unit, even if
the price is less than his original cost.
Gain or loss recognized by a unitholder, other than a "dealer" in common
units, on the sale or exchange of a common unit will generally be taxable as
capital gain or loss. Capital gain recognized on the sale of common units held
for more than 12 months will generally be taxed at a maximum rate of 15%. A
portion of this gain or loss, which could be substantial, however, will be
separately computed and taxed as ordinary income or loss under Section 751 of
the Internal Revenue Code to the extent attributable to assets giving rise to
depreciation recapture or other "unrealized receivables" or to "inventory
items" owned by us. The term "unrealized receivables" includes potential
recapture items, including depreciation recapture. Ordinary income attributable
to unrealized receivables, inventory items and depreciation recapture may
exceed net taxable gain realized upon the sale of the common unit and may be
recognized even if there is a net taxable loss realized on the sale of the
common unit. Thus, a unitholder may recognize both ordinary income and a
capital loss upon a disposition of common units. Net capital loss may offset no
more than $3,000 of ordinary income in the case of individuals and may only be
used to offset capital gain in the case of corporations.
The IRS has ruled that a partner who acquires interests in a partnership
in separate transactions must combine those interests and maintain a single
adjusted tax basis. Upon a sale or other disposition of less than all of such
interests, a portion of that tax basis must be allocated to the interests sold
using an "equitable apportionment" method. If this ruling is applicable to the
holders of common units, a unitholder will be unable to select high or low
basis common units to sell as would be the case with corporate stock. Thus, the
ruling may result in an acceleration of gain or a deferral of loss on a sale of
a portion of a unitholder's common units. It is not entirely clear that the
ruling applies to us because, similar to corporate stock, our interests are
evidenced by separate certificates. Accordingly, counsel is unable to opine as
to the effect such ruling will have on the unitholders. However, an example
involving a publicly traded partnership in treasury regulation Section 1.1223-3
(which provides guidance for determining when a partner will have a divided
holding period in its partnership interest) concludes that such ruling will
apply to a publicly traded partnership. A unitholder considering the purchase
of additional common units or a sale of common units purchased in separate
transactions should consult his tax advisor as to the possible consequences of
such ruling.
Certain provisions of the Internal Revenue Code affect the taxation of
certain financial products and securities, including partnership interests, by
treating a taxpayer as having sold an "appreciated" partnership interest, one
in which gain would be recognized if it were sold, assigned or otherwise
terminated at its fair market value, if the taxpayer or a related person enters
into
o certain types of short sales;
o an offsetting notional principal contract; or
o a futures or forward contract with respect to the partnership interest
or substantially identical property.
Moreover, if a taxpayer has previously entered into a short sale, an
offsetting notional principal contract or a futures or forward contract with
respect to a partnership interest, the taxpayer will be
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treated as having sold such position if the taxpayer or a related person then
acquires the partnership interest or substantially similar property. The
Secretary of the Treasury is also authorized to issue regulations that treat a
taxpayer that enters into transactions or positions that have substantially the
same effect as the preceding transactions as having constructively sold the
financial position.
ALLOCATIONS BETWEEN TRANSFERORS AND TRANSFEREES
In general, our taxable income and losses are determined annually, are
prorated on a monthly basis and are subsequently apportioned among the
unitholders in proportion to the number of common units owned by each of them
as of the opening of the principal national securities exchange on which the
common units are then traded on the first business day of the month (the
"Allocation Date"). However, gain or loss realized on a sale or other
disposition of our assets other than in the ordinary course of business is
allocated among the unitholders on the Allocation Date in the month in which
that gain or loss is recognized. As a result, a unitholder transferring common
units in the open market may be allocated income, gain, loss and deduction
accrued after the date of transfer.
The use of this method may not be permitted under existing Treasury
Regulations. Accordingly, counsel is unable to opine on the validity of this
method of allocating income and deductions between the transferors and the
transferees of common units. If this method is not allowed under the Treasury
Regulations, or only applies to transfers of less than all of the unitholder's
interest, our taxable income or losses might be reallocated among the
unitholders. We are authorized to revise our method of allocation between
transferors and transferees, as well as among partners whose interests
otherwise vary during a taxable period, to conform to a method permitted under
future Treasury Regulations.
Any unitholder who owns common units at any time during a quarter and who
disposes of such common units prior to the record date set for a cash
distribution with respect to such quarter will be allocated items of our
income, gain, loss and deductions attributable to such quarter but will not be
entitled to receive that cash distribution.
NOTIFICATION REQUIREMENTS
A unitholder who sells or exchanges common units is required to notify us
in writing of that sale or exchange within 30 days after the sale or exchange
and in any event by no later than January 15 of the year following the calendar
year in which the sale or exchange occurred. We are required to notify the IRS
of that transaction and to furnish certain information to the transferor and
transferee. However, these reporting requirements do not apply with respect to
a sale by an individual who, for U.S. federal income tax purposes, is a citizen
or a resident of the United States and who effects the sale or exchange through
a broker. Because we have made an election under Section 754 of the Internal
Revenue Code, a purchaser of an interest in us, or his broker, is required to
notify us of the transfer of such interest and we are required to include a
statement with our Partnership Return for the taxable year in which we receive
notice of the transfer, setting forth the name and taxpayer identification
number of the transferee, the computation of any Section 743(b) basis
adjustment and the allocation of such adjustment among our properties. A
unitholder who is required to recognize ordinary income or loss under Section
751 of the Internal Revenue Code upon the sale or exchange of a common unit
must submit with its federal income tax return for the taxable year in which
the sale or exchange occurs, a statement setting forth the date of the sale or
exchange, the amount of gain or loss attributable to the Section 751 property
and the amount of capital gain or loss. Failure to satisfy these reporting
obligations may lead to the imposition of substantial penalties.
CONSTRUCTIVE TERMINATION
We will be considered to have been terminated if, in the aggregate, there
is a sale or exchange of 50% or more of the total interests in our capital and
profits within a 12-month period. If we elect to be treated as a large
partnership, which we currently do not intend to do, we will not terminate by
reason of the sale or exchange of interests in us. A termination of us will
cause a termination of the Operating Partnership. Any such termination would
result in the closing of our taxable year for all
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unitholders. New tax elections required to be made by us, including a new
election under Section 754 of the Internal Revenue Code, must be made
subsequent to a termination, and a termination would result in a deferral of
our deductions for depreciation. A termination could also result in penalties
if we were unable to determine that the termination had occurred. Moreover, a
termination might either accelerate the application of, or subject us to, any
tax legislation enacted prior to the termination.
TAX-EXEMPT ORGANIZATIONS AND CERTAIN OTHER INVESTORS
Ownership of common units by employee benefit plans, other tax-exempt
organizations, nonresident aliens, foreign corporations, other foreign persons
and regulated investment companies raises issues unique to such persons and, as
described below, may have substantially adverse tax consequences. Employee
benefit plans and most other organizations exempt from federal income tax,
including individual retirement accounts and other retirement plans, are
subject to federal income tax on unrelated business taxable income. Virtually
all of our taxable income allocated to such an organization will be unrelated
business taxable income and thus will be taxable to such a unitholder.
A regulated investment company or "mutual fund" is required to derive 90%
or more of its gross income from interest, dividends, gains from the sale of
stocks or securities or foreign currency or certain related sources. It is not
anticipated that any significant amount of our gross income will include that
type of income.
Nonresident aliens and foreign corporations, trusts or estates which hold
common units will be considered to be engaged in business in the United States
on account of ownership of common units. As a consequence they will be required
to file federal tax returns in respect of their share of our income, gain, loss
or deduction and pay federal income tax at regular rates on any net income or
gain. Generally, a partnership is required to pay a withholding tax on the
portion of the partnership's income which is effectively connected with the
conduct of a United States trade or business and which is allocable to the
foreign partners, regardless of whether any actual distributions have been made
to such partners. However, under rules applicable to publicly traded
partnerships, the transfer agent or United States nominee will withhold taxes
(currently at the rate of 35%) on actual cash distributions made quarterly to
foreign unitholders. Each foreign unitholder must obtain a taxpayer
identification number from the IRS and submit that number to our Transfer Agent
on a Form W-8 in order to obtain credit for the taxes withheld. A change in
applicable law may require us to change these procedures.
Because a foreign corporation which owns common units will be treated as
engaged in a United States trade or business, such a corporation may be subject
to United States branch profits tax at a rate of 30%, in addition to regular
federal income tax, on its allocable share of our income and gain, as adjusted
for changes in the foreign corporation's "U.S. net equity," which are
effectively connected with the conduct of a United States trade or business. An
income tax treaty between the United States and the country in which the
foreign corporate unitholder is a "qualified resident" may reduce or eliminate
this tax. In addition, such a unitholder is subject to special information
reporting requirements under Section 6038C of the Internal Revenue Code.
Under a ruling of the IRS, a foreign unitholder who sells or otherwise
disposes of a common unit will be subject to federal income tax on gain
realized on the disposition of such common unit to the extent that such gain is
effectively connected with a United States trade or business of the foreign
unitholder. Apart from the ruling, a foreign unitholder will not be taxed upon
the disposition of a common unit if that foreign unitholder has held less than
5% in value of the common units at all times during the five-year period ending
on the date of the disposition and if the common units are regularly traded on
an established securities market at the time of the disposition.
ADMINISTRATIVE MATTERS
INFORMATION RETURNS AND AUDIT PROCEDURES
We intend to furnish to each unitholder, within 90 days after the close of
each calendar year, certain tax information, including a Schedule K-1, which
sets forth such unitholder's share of our
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income, gain, loss and deduction for our preceding taxable year. In preparing
this information, which will generally not be reviewed by counsel, we will use
various accounting and reporting conventions, some of which have been mentioned
in the previous discussion, to determine the unitholder's share of income,
gain, loss and deduction. There is no assurance that any of those conventions
will yield a result which conforms to the requirements of the Internal Revenue
Code, Treasury Regulations or administrative interpretations of the IRS. We
cannot assure prospective unitholders that the IRS will not successfully
contend in court that such accounting and reporting conventions are
impermissible. Any such challenge by the IRS could result in a reallocation of
our income to the unitholders and could negatively affect the value of the
common units.
The IRS may audit our federal income tax information returns. Adjustments
resulting from any such audit may require each unitholder to adjust a prior
year's tax liability, and possibly may result in an audit of the unitholder's
own return. Any audit of a unitholder's return could result in adjustments not
related to our returns as well as those related to our returns.
Partnerships generally are treated as separate entities for purposes of
federal tax audits, judicial review of administrative adjustments by the IRS
and tax settlement proceedings. The tax treatment of partnership items of
income, gain, loss and deduction are determined in a partnership proceeding
rather than in separate proceedings with the partners. The Internal Revenue
Code provides for one partner to be designated as the "Tax Matters Partner" for
these purposes. Our partnership agreement appoints the general partner as our
Tax Matters Partner.
The Tax Matters Partner will make certain elections on our behalf and on
behalf of the unitholders and can extend the statute of limitations for
assessment of tax deficiencies against unitholders with respect to items in our
returns. The Tax Matters Partner generally may bind a unitholder with less than
a 1% profits interest in us to a settlement with the IRS unless that unitholder
elects, by filing a statement with the IRS, not to give such authority to the
Tax Matters Partner. The Tax Matters Partner may seek judicial review, by which
all the unitholders are bound, of a final partnership administrative adjustment
and, if the Tax Matters Partner fails to seek judicial review, such review may
be sought by any unitholder having at least a 1% interest in our profits and by
the unitholders having in the aggregate at least a 5% profits interest.
However, only one action for judicial review will go forward, and each
unitholder with an interest in the outcome may participate. However, if we
elect to be treated as a large partnership, which we do not intend to do
because of the costs of application, a unitholder will not have a right to
participate in settlement conferences with the IRS or to seek a refund.
A unitholder must file a statement with the IRS identifying the treatment
of any item on his federal income tax return that is not consistent with the
treatment of the item on our return. Intentional or negligent disregard of the
consistency requirement may subject a unitholder to substantial penalties.
Partners in electing large partnerships are required to treat all items from
the partnership's return in a manner consistent with such return. If we elect
to be treated as a large partnership, each partner would take into account
separately his share of the following items, determined at the partnership
level: (1) taxable income or loss from passive loss limitation activities; (2)
taxable income or loss from other activities, such as portfolio income or loss;
(3) net capital gains to the extent allocable to passive loss limitation
activities and other activities; (4) tax exempt interest; (5) a net alternative
minimum tax adjustment separately computed for passive loss limitation
activities and other activities; (6) general credits; (7) low-income housing
credit; (8) rehabilitation credit; (9) foreign income taxes; (10) credit for
producing fuel from a nonconventional source; and (11) any other items the
Secretary of the Treasury deems appropriate. Moreover, miscellaneous itemized
deductions would not be passed through to the partners and 30% of those
deductions would be used at the partnership level.
Adjustments relating to partnership items for a previous taxable year are
generally taken into account by those persons who were partners in the previous
taxable year. Each partner in an electing large partnership, however, must take
into account his share of any adjustments to partnership items in the year such
adjustments are made. Alternatively, a large partnership could elect to or, in
some circumstances, could be required to directly pay the tax resulting from
any such
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adjustments. In either case, therefore, unitholders of an electing large
partnership could bear significant costs associated with tax adjustments
relating to periods predating their acquisition of units. We do not expect to
elect to have the large partnership provisions apply to us because of the cost
of their application.
NOMINEE REPORTING
Persons who hold an interest in us as a nominee for another person are
required to furnish to us (a) the name, address and taxpayer identification
number of the beneficial owner and the nominee; (b) whether the beneficial
owner is (i) a person that is not a United States person, (ii) a foreign
government, an international organization or any wholly-owned agency or
instrumentality of either of the foregoing, or (iii) a tax-exempt entity; (c)
the amount and description of common units held, acquired or transferred for
the beneficial owner; and (d) certain information including the dates of
acquisitions and transfers, means of acquisitions and transfers, and
acquisition cost for purchases, as well as the amount of net proceeds from
sales.
Brokers and financial institutions are required to furnish additional
information, including whether they are United States persons and certain
information on common units they acquire, hold or transfer for their own
account. A penalty of $50 per failure, up to a maximum of $100,000 per calendar
year, is imposed by the Internal Revenue Code for failure to report such
information to us. The nominee is required to supply the beneficial owner of
the common units with the information furnished to us.
REGISTRATION AS A TAX SHELTER
The Internal Revenue Code requires that "tax shelters" be registered with
the Secretary of the Treasury. The temporary Treasury Regulations interpreting
the tax shelter registration provisions of the Internal Revenue Code are
extremely broad. It is arguable that we are not subject to the registration
requirement on the basis that we do not constitute a tax shelter. However, we
have registered as a tax shelter with the Secretary of the Treasury in the
absence of assurance that we are not subject to tax shelter registration and in
light of the substantial penalties which might be imposed if registration is
required and not undertaken. The IRS has issued us the following tax shelter
registration number: 96080000050.
Issuance of the registration number does not indicate that an investment in us
or the claimed tax benefits have been reviewed, examined or approved by the
IRS.
We must furnish the registration number to the unitholders, and a
unitholder who sells or otherwise transfers a common unit in a subsequent
transaction must furnish the registration number and a written statement
containing certain other information to the transferee. The penalty for failure
of the transferor of a common unit to furnish the registration number to the
transferee is $100 for each such failure. The unitholders must disclose our tax
shelter registration number on Form 8271 to be attached to the tax return on
which any deduction, loss or other benefit generated by us is claimed or our
income is included. A unitholder who fails to disclose the tax shelter
registration number on his return, without reasonable cause for that failure,
will be subject to a $250 penalty for each failure. Any penalties discussed
herein are not deductible for federal income tax purposes. Registration as a
tax shelter may increase the risk of an audit.
REPORTABLE TRANSACTION DISCLOSURE
In certain circumstances, a unitholder who disposes of common units in a
transaction resulting in the recognition by such unitholder of significant
losses in excess of certain threshold amounts may be obligated to disclose its
participation in such transaction in accordance with recently issued Treasury
Regulations governing tax shelters and other potentially tax-motivated
transactions. Prospective unitholders should consult their tax advisors
concerning any possible disclosure obligation under such Treasury Regulations
with respect to the disposition of such units.
ACCURACY-RELATED PENALTIES
An additional tax equal to 20% of the amount of any portion of an
underpayment of tax which is attributable to one or more specified causes,
including negligence or disregard of rules or regulations,
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substantial understatements of income tax and substantial valuation
misstatements, is imposed by the Internal Revenue Code. No penalty will be
imposed, however, with respect to any portion of an underpayment if it is shown
that there was a reasonable cause for that portion and that the taxpayer acted
in good faith with respect to that portion.
A substantial understatement of income tax in any taxable year exists if
the amount of the understatement exceeds the greater of 10% of the tax required
to be shown on the return for the taxable year or $5,000 ($10,000 for most
corporations). The amount of any understatement subject to penalty generally is
reduced if any portion is attributable to a position adopted on the return (i)
with respect to which there is, or was, "substantial authority" or (ii) as to
which there is a reasonable basis and the pertinent facts of such position are
disclosed on the return. More stringent rules apply to "tax shelters," a term
that in this context does not appear to include us. If any item of our income,
gain, loss or deduction included in the distributive shares of unitholders
might result in such an "understatement" of income for which no "substantial
authority" exists, we must disclose the pertinent facts on our return. In
addition, we will make a reasonable effort to furnish sufficient information
for unitholders to make adequate disclosure on their returns to avoid liability
for this penalty.
A substantial valuation misstatement exists if the value of any property,
or the adjusted basis of any property, claimed on a tax return is 200% or more
of the amount determined to be the correct amount of such valuation or adjusted
basis. No penalty is imposed unless the portion of the underpayment
attributable to a substantial valuation misstatement exceeds $5,000 ($10,000
for most corporations). If the valuation claimed on a return is 400% or more
than the correct valuation, the penalty imposed increases to 40%.
STATE, LOCAL AND OTHER TAX CONSIDERATIONS
In addition to federal income taxes, a unitholder will be subject to other
taxes, such as state and local income taxes, unincorporated business taxes, and
estate, inheritance or intangible taxes that may be imposed by the various
jurisdictions in which he resides or in which we do business or own property.
Although an analysis of those various taxes is not presented here, each
prospective unitholder should consider their potential impact on his investment
in us. We currently conduct business in 47 states. Many of these states
currently impose a state income tax. A unitholder will be required to file
state income tax returns and to pay state income taxes in some or all of these
states and may be subject to penalties for failure to comply with those
requirements. In some states, tax losses may not produce a tax benefit in the
year incurred and also may not be available to offset income in subsequent
taxable years. Some of the states may require us, or we may elect, to withhold
a percentage of income from amounts to be distributed to a unitholder who is
not a resident of the state. The amount of withholding currently required by
the states in which we do business is not material. Withholding, the amount of
which may be greater or less than a particular unitholder's income tax
liability to the state, generally does not relieve the nonresident unitholder
from the obligation to file an income tax return. Amounts withheld may be
treated as if distributed to unitholders for purposes of determining the
amounts distributed by us. See "--Tax Treatment of Unitholders--Entity-Level
Collections."
IT IS THE RESPONSIBILITY OF EACH UNITHOLDER TO INVESTIGATE THE LEGAL AND
TAX CONSEQUENCES TO ITS PARTICULAR OR INDIVIDUAL CIRCUMSTANCES, UNDER THE LAWS
OF PERTINENT STATES AND LOCALITIES OF AN INVESTMENT IN US. ACCORDINGLY, EACH
PROSPECTIVE UNITHOLDER SHOULD CONSULT, AND MUST DEPEND UPON, ITS OWN TAX
COUNSEL OR OTHER ADVISOR WITH REGARD TO THOSE MATTERS. FURTHER, IT IS THE
RESPONSIBILITY OF EACH UNITHOLDER TO FILE ALL STATE AND LOCAL, AS WELL AS U.S.
FEDERAL, TAX RETURNS THAT MAY BE REQUIRED OF SUCH UNITHOLDER. COUNSEL HAS NOT
RENDERED AN OPINION ON THE STATE OR LOCAL TAX CONSEQUENCES OF AN INVESTMENT IN
US.
INVESTMENT IN COMMON UNITS BY EMPLOYEE BENEFIT PLANS
An investment in common units by an employee benefit plan is subject to
additional considerations because the investments of these plans are subject to
the fiduciary responsibility and prohibited transaction provisions of the
Employee Retirement Income Security Act of 1974, as
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amended ("ERISA"), and restrictions imposed by Section 4975 of the Internal
Revenue Code. For these purposes, the term "employee benefit plan" includes,
but is not limited to, qualified pension, profit-sharing and stock bonus plans,
Keogh plans, simplified employee pension plans and tax deferred annuities or
IRAs established or maintained by an employer or employee organization.
The person with investment discretion with respect to the assets of an
employee benefit plan, often called a fiduciary, should determine whether an
investment in common units is authorized by the appropriate governing
instrument and is a proper investment for the plan.
Section 406 of ERISA and Section 4975 of the Internal Revenue Code
prohibit employee benefit plans, and also IRAs that are not employee benefit
plans, from engaging in specified transactions involving "plan assets," within
the meaning of Department of Labor Regulations Section 22510.3-101 (the "Plan
Asset Regulations"), with parties that are "parties in interest" under ERISA or
"disqualified persons" under the Internal Revenue Code with respect to such
plans.
A fiduciary of an employee benefit plan should also consider whether the
plan will, by investing in common units, be deemed to own an undivided interest
in our assets, with the result that our general partner also would be a
fiduciary of such plan and our operations would be subject to certain
restrictions of ERISA and the Internal Revenue Code, including their prohibited
transaction rules.
The Plan Asset Regulations provide guidance with respect to when the
assets of an entity in which employee benefit plans acquire equity interests
would be deemed "plan assets." Under these regulations, an entity's assets
would not be considered to be "plan assets" if an exemption applies, including
whether the entity is an "operating company,"--i.e., it is primarily engaged,
either directly or through a majority owned subsidiary or subsidiaries, in the
production or sale of a product or service other than the investment of
capital. We believe we are an "operating company" within the meaning of the
Plan Asset Regulations.
Plan fiduciaries contemplating a purchase of common units should consult
with their own counsel regarding the consequences under ERISA and the Internal
Revenue Code.
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UNDERWRITING
We and the underwriters named below have entered into an underwriting
agreement with respect to the common units being offered. Subject to the
conditions in the underwriting agreement, each underwriter has severally agreed
to purchase the number of common units indicated in the following table.
Underwriters Number of Common Units
------------------------------------------ -----------------------
Goldman, Sachs & Co. ..................... 1,040,000
Wachovia Capital Markets, LLC ............ 1,040,000
Raymond James & Associates, Inc. ......... 520,000
---------
Total ................................... 2,600,000
=========
The underwriters are committed to take and pay for all of the common units
being offered, if any are taken, other than the common units covered by the
option described below unless and until this option is exercised.
If the underwriters sell more common units than the total number set forth
in the table above, the underwriters have an option to buy up to an additional
390,000 common units from us to cover such sales. They may exercise that option
for 30 days. If any common units are purchased pursuant to this option, the
underwriters will severally purchase common units in approximately the same
proportion as set forth in the table above.
The following table shows the per common unit and total underwriting
discounts and commissions to be paid to the underwriters by us. Such amounts
are shown assuming both no exercise and full exercise of the underwriters'
option to purchase 390,000 additional common units.
Paid by Suburban Propane Partners
No Exercise Full Exercise
------------- --------------
Per Common Unit ............................ $ 1.31 $ 1.31
Total ...................................... $3,406,000 $3,916,900
Common units sold by the underwriters to the public will initially be
offered at the initial price to public set forth on the cover of this
prospectus supplement. Any common units sold by the underwriters to securities
dealers may be sold at a discount of up to $0.79 per common unit from the
initial price to public. Any such securities dealers may resell any common
units purchased from the underwriters to other brokers or dealers at a discount
of up to $0.10 per common unit from the initial price to public. If all the
common units are not sold at the initial price to public, the representatives
may change the offering price and the other selling terms.
We, our officers and the members of our Board of Supervisors have agreed
with the underwriters not to dispose of or hedge any of the common units,
securities similar to the common units or securities convertible into or
exchangeable for the common units during the period from the date of this
prospectus supplement continuing through the date 90 days after the date of
this prospectus supplement, except with the prior written consent of the
representatives, and except that our officers may collectively sell or dispose
of up to an aggregate of 35,000 of our common units. This agreement also does
not apply to any existing employee benefit plans, common unit option plans or
restricted common unit plans.
In connection with the offering, the underwriters may purchase and sell
common units in the open market. These transactions may include short sales,
stabilizing transactions and purchases to cover positions created by short
sales. Short sales involve the sale by the underwriters of a greater number of
common units than they are required to purchase in the offering. "Covered"
short sales are sales made in an amount not greater than the underwriters'
option to purchase additional common units from us in the offering. The
underwriters may close out any covered short position by
S-62
either exercising their option to purchase additional common units or
purchasing common units in the open market. In determining the source of common
units to close out the covered short position, the underwriters will consider,
among other things, the price of common units available for purchase in the
open market as compared to the price at which they may purchase additional
common units pursuant to the option granted to them. "Naked" short sales are
any sales in excess of such option. The underwriters must close out any naked
short position by purchasing common units in the open market. A naked short
position is more likely to be created if the underwriters are concerned that
there may be downward pressure on the price of the common units in the open
market after pricing that could adversely affect investors who purchase in the
offering. Stabilizing transactions consist of various bids for or purchases of
common units made by the underwriters in the open market prior to the
completion of the offering.
The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased common
units sold by or for the account of that underwriter in stabilizing or short
covering transactions.
Purchases to cover a short position and stabilizing transactions may have
the effect of preventing or retarding a decline in the market price of our
common units, and together with the imposition of the penalty bid, may
stabilize, maintain or otherwise affect the market price of the common units.
As a result, the price of the common units may be higher than the price that
otherwise might exist in the open market. If these activities are commenced,
they may be discontinued at any time. These transactions may be effected on the
New York Stock Exchange, in the over-the-counter market or otherwise.
We estimate that our share of the total expenses of the offering,
excluding underwriting discounts and commissions, will be approximately $1.0
million.
We have agreed to indemnify the several underwriters against the
liabilities described in the underwriting agreement, including liabilities
under the Securities Act of 1933.
Goldman, Sachs & Co., Wachovia Capital Markets, LLC and their respective
affiliates have, from time to time, provided, and the underwriters and their
respective affiliates may in the future provide, financial advisory, investment
banking, and general financing and banking services to us and our affiliates,
for which they have received, and may receive, customary fees and expenses.
Affiliates of certain of the underwriters also have agreed to provide
alternative financing to fund a portion of the Acquisition if this offering or
the concurrent private placement of senior notes is not consummated. Goldman,
Sachs & Co. is a beneficial owner of approximately 6.3% of our outstanding
common units through discretionary investment accounts of brokerage clients,
calculated without giving effect to this offering. An affiliate of Wachovia
Capital Markets, LLC is the administrative agent under our senior credit
facility.
LEGAL OPINIONS
The validity of the common units offered hereby are being passed upon for
us by Cahill Gordon & Reindel LLP, New York, New York. Certain legal matters in
connection with this offering will be passed upon for the underwriters by
Latham & Watkins LLP, New York, New York.
EXPERTS
The financial statements of Suburban Propane Partners, L.P. incorporated
in this prospectus supplement and the accompanying prospectus by reference to
our Annual Report on Form 10-K for the fiscal year ended September 27, 2003
have been so incorporated in reliance on the report of PricewaterhouseCoopers
LLP, independent accountants, given on the authority of said firm as experts in
auditing and accounting. The financial statements of Suburban Energy Services
Group LLC incorporated in this prospectus supplement and the accompanying
prospectus by reference to our Annual Report on Form 10-K for the fiscal year
ended September 27, 2003 have been so incorporated in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants,
S-63
given on the authority of said firm as experts in auditing and accounting. The
combined financial statements of Agway Energy Group (Agway Energy Products LLC,
Agway Energy Services, Inc. and Agway Energy Services PA, Inc.) incorporated in
this prospectus supplement and the accompanying prospectus by reference to our
current report on Form 8-K filed December 5, 2003 have been so incorporated in
reliance on the report (which contains an explanatory paragraph relating to
Agway Energy Group's ability to continue as going concern as described in Note
3 to the combined financial statements) of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
FORWARD-LOOKING STATEMENTS
This prospectus supplement, the accompanying prospectus and the documents
incorporated by reference include forward-looking statements within the meaning
of Section 27A of the Securities Act. All statements that do not relate
strictly to historical or current facts are forward-looking statements. They
use words such as "anticipate," "believe," "intend," "plan," "projection,"
"forecast," "strategy," "position," "continue," "estimate," "expect," "may,"
"will," or the negative of those terms or similar words. In particular,
statements, express or implied, concerning future operating results or the
ability to generate sales, income or cash flow are forward-looking statements.
Forward-looking statements are not guarantees of performance. They involve
risks, uncertainties and assumptions involving future events that we may not be
able to accurately predict or over which we have no control. Therefore, the
future results of our company may differ materially from those expressed in
these forward-looking statements. Specific factors which could cause actual
results to differ from those in the forward-looking statements are discussed in
the "Risk Factors" section of this prospectus supplement. You should not put
undue reliance on any forward-looking statements.
S-64
PROSPECTUS
$500,000,000
SUBURBAN PROPANE PARTNERS, L.P.
DEBT SECURITIES
COMMON UNITS REPRESENTING LIMITED PARTNERSHIP INTERESTS
We may offer, from time to time, in one or more series:
o unsecured senior debt securities;
o unsecured subordinated debt securities; and
o common units representing limited partnership interests in Suburban Propane
Partners, L.P.
The securities:
o will have a maximum aggregate offering price of $500,000,000;
o will be offered at prices and on terms to be set forth in one or more
accompanying prospectus supplements;
o may be denominated in U.S. dollars or in other currencies or currency
units;
o may be offered separately or together, or in separate series; and
o may be listed on a national securities exchange, if specified in an
accompanying prospectus supplement.
----------------
Our common units are listed on the New York Stock Exchange under
the symbol "SPH."
----------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES, OR DETERMINED IF
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
----------------
THE SECURITIES MAY BE SOLD FROM TIME TO TIME DIRECTLY, THROUGH AGENTS OR
THROUGH UNDERWRITERS AND/OR DEALERS. IF ANY AGENT OF THE ISSUER OR ANY
UNDERWRITER IS INVOLVED IN THE SALE OF THE SECURITIES, THE NAME OF SUCH AGENT
OR UNDERWRITER AND ANY APPLICABLE COMMISSION OR DISCOUNT WILL BE SET FORTH IN
THE ACCOMPANYING PROSPECTUS SUPPLEMENT.
----------------
THIS PROSPECTUS MAY BE USED TO OFFER AND SELL SECURITIES ONLY IF
ACCOMPANIED BY A PROSPECTUS SUPPLEMENT.
----------------
The date of this prospectus is October 23, 2003
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT. NO
PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS OR
THE ACCOMPANYING PROSPECTUS SUPPLEMENT AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY US OR
ANY UNDERWRITER, DEALER OR AGENT. NEITHER THIS PROSPECTUS NOR THE ACCOMPANYING
PROSPECTUS SUPPLEMENT CONSTITUTES AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. YOU SHOULD NOT ASSUME THAT THE INFORMATION PROVIDED BY
THIS PROSPECTUS OR THE ACCOMPANYING PROSPECTUS SUPPLEMENT IS ACCURATE AS OF ANY
DATE OTHER THAN THE RESPECTIVE DATES ON THE FRONT OF THOSE DOCUMENTS.
IN THIS PROSPECTUS AND IN THE ACCOMPANYING PROSPECTUS SUPPLEMENT, UNLESS
THE CONTEXT REQUIRES OTHERWISE, REFERENCES TO "SUBURBAN," "WE," "US" AND "OUR"
MEAN OUR COMPANY, ITS SUBSIDIARY OPERATING PARTNERSHIP, SUBURBAN PROPANE, L.P.,
AND ITS WHOLLY OWNED SUBSIDIARIES.
TABLE OF CONTENTS
PAGE
About This Prospectus .............................................. 1
Where You Can Find More Information ................................ 1
Incorporation of Certain Documents by Reference .................... 1
Forward-Looking Statements ......................................... 2
Our Company ........................................................ 2
Risk Factors ....................................................... 3
Use of Proceeds .................................................... 3
Ratio of Earnings to Fixed Charges ................................. 3
Description of Debt Securities ..................................... 3
Description of Common Units ........................................ 8
Our Partnership Agreement .......................................... 10
Tax Considerations ................................................. 15
Plan of Distribution ............................................... 15
Legal Matters ...................................................... 16
Experts ............................................................ 16
------------------
i
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we have filed
with the Securities and Exchange Commission, the SEC, utilizing a shelf
registration process. Under this shelf registration process, we may sell any
combination of the securities described in this prospectus in one or more
offerings up to an aggregate offering price of $500,000,000. This prospectus
provides you with a general description of the securities we may offer. This
prospectus does not contain all of the information set forth in the
registration statement as permitted by the rules and regulations of the SEC.
For additional information regarding Suburban and the offered securities,
please refer to the registration statement. Each time we sell securities, we
will provide a prospectus supplement that will contain specific information
about the terms of that offering. The prospectus supplement may also add,
update or change information contained in this prospectus. You should read both
this prospectus and any prospectus supplement together with additional
information described under the heading "Where You Can Find More Information."
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Securities
Exchange Act of 1934, as amended. As a result, we file reports and other
information with the SEC. You may read and copy any materials that we file with
the SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. You may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330. Any information
filed by us is also available on the SEC's EDGAR database at
http://www.sec.gov. Our common units are listed on the New York Stock Exchange,
and reports, proxy statements and other information can be inspected at the
offices of the NYSE at 20 Broad Street, New York, New York 10005.
We have filed with the SEC a registration statement on Form S-3. This
prospectus, which is a part of the registration statement, omits selected
information contained in the registration statement. Statements made in this
prospectus as to the contents of any contract, agreement or other document are
not necessarily complete. With respect to each contract, agreement or other
document filed as an exhibit to the registration statement, we refer you to
that exhibit for a more complete description of the matter involved, and each
statement is deemed qualified in its entirety by reference to that exhibit.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The SEC allows us to incorporate by reference the information we file with
them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
an important part of this prospectus. Information we later file with the SEC
will automatically update and supersede this information. We are incorporating
by reference in this prospectus the following documents that we have filed with
the SEC:
o our Current Report on Form 8-K filed October 14, 2003;
o our Annual Report on Form 10-K for the fiscal year ended September 28,
2002;
o our Quarterly Report on Form 10-Q for the fiscal quarter ended
December 28, 2002;
o our Quarterly Report on Form 10-Q for the fiscal quarter ended March
29, 2003;
o our Quarterly Report on Form 10-Q for the fiscal quarter ended June
28, 2003; and
o the description of the common units in our registration statement on
Form 8-A filed on February 22, 1996.
We also incorporate by reference all documents that we may file with the
SEC pursuant to Sections 13(a), 13(b), 14 and 15(d) of the Securities Exchange
Act after the date of this prospectus and prior to the termination of this
offering.
1
You may request a copy of any of these documents, at no cost, by writing
or telephoning our Investor Relations Department at the following address and
telephone number:
Suburban Propane Partners, L.P.
240 Route 10 West
Whippany, New Jersey 07981
Telephone No.: (973) 887-5300
You should rely on the information provided in this prospectus and the
documents we have incorporated by reference. We have not authorized anyone to
provide you with different information. We will make offers of the securities
only in states where those offers are permitted. You should not assume that the
information in this prospectus or any incorporated document is accurate as of
any date other than the date of this prospectus or that document, as the case
may be.
FORWARD-LOOKING STATEMENTS
This prospectus, any prospectus supplement, and the documents incorporated
by reference may include forward-looking statements within the meaning of
Section 27A of the Securities Act. All statements that do not relate strictly
to historical or current facts are forward-looking statements. They use words
such as "anticipate," "believe," "intend," "plan," "projection," "forecast,"
"strategy," "position," "continue," "estimate," "expect," "may," "will," or the
negative of those terms or similar words. In particular, statements, express or
implied, concerning future operating results or the ability to generate sales,
income or cash flow are forward-looking statements. Forward-looking statements
are not guarantees of performance. They involve risks, uncertainties and
assumptions involving future events that we may not be able to accurately
predict or over which we have no control. Therefore, the future results of our
company may differ materially from those expressed in these forward-looking
statements. Specific factors which could cause actual results to differ from
those in the forward-looking statements will be discussed in any prospectus
supplement under the heading "Risk Factors." You should not put undue reliance
on any forward-looking statements.
We will not update these forward-looking statements, whether as a result
of new information, future events or otherwise. You should, however, review
additional disclosures we make in our Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K and Annual Reports on Form 10-K filed with the SEC.
OUR COMPANY
We are retail and wholesale marketers of propane and related appliances
and services. We believe, based on LP/Gas Magazine dated February 2003, that we
were the third largest retail marketer of propane in the United States,
measured by retail gallons sold in the year 2002. During the 2002 fiscal year,
we sold approximately 456.0 million gallons of propane to retail customers and
an additional 95.3 million gallons at wholesale to other distributors and large
industrial end-users. As of June 28, 2003, we served approximately 750,000
active residential, commercial, industrial and agricultural customers from more
than 320 customer service centers in over 40 states. In addition, we own Gas
Connection, Inc. (d/b/a HomeTown Hearth & Grill), which operates eleven retail
stores in the northeast and northwest regions of the United States that sell
and install natural gas and propane gas grills, fireplaces and related
accessories and supplies. We also own Suburban @ Home, Inc., an internally
developed heating, ventilation and air conditioning business that operates five
locations.
Our operations are concentrated in the east and west coast regions of the
United States. Our geographic diversity lessens our exposure to weather
conditions affecting operations in particular regions. We own two storage
facilities: a 22 million gallon aboveground facility in Elk Grove, California
and a 60 million gallon underground facility in Tirzah, South Carolina. We are
supplied by nearly 70 suppliers nationwide. Together with our predecessor
companies, we have been continuously engaged in the retail propane business
since 1928.
We maintain our executive offices at 240 Route 10 West, Whippany, New
Jersey 07981, and our telephone number at that address is (973) 887-5300.
2
RISK FACTORS
Investing in our securities involves risk. The prospectus supplement
applicable to each type or series of securities we offer will contain a
discussion of risks applicable to an investment in Suburban and to the
particular types of securities that we are offering under that prospectus
supplement. Prior to making a decision about investing in our securities, you
should carefully consider the specific factors discussed under the heading
"Risk Factors" in the applicable prospectus supplement together with all of the
other information contained in the prospectus supplement or appearing or
incorporated by reference in this prospectus.
USE OF PROCEEDS
Unless we set forth other uses of proceeds in the prospectus supplement,
we will use the net proceeds of the sale of the securities described in this
prospectus and any prospectus supplement for general corporate purposes. These
may include, among other uses, the reduction of outstanding indebtedness,
working capital increases, capital expenditures or acquisitions.
RATIO OF EARNINGS TO FIXED CHARGES
We have set forth below our ratio of earnings to fixed charges for each of
the years in the five year period ended September 28, 2002 and the interim
period presented.
YEAR ENDED
------------------------------------------------------------------------------ NINE MONTHS
ENDED
SEPTEMBER 28, SEPTEMBER 25, SEPTEMBER 30, SEPTEMBER 29, SEPTEMBER 28, JUNE 28,
1998 1999 2000 2001 2002 2003
-------------- --------------- --------------- --------------- --------------- ------------
Ratio of earnings to
fixed charges(1) ... 1.99x 1.58x 1.79x 2.13x 2.23x 3.06x
----------
(1) For purposes of determining the ratio of earnings to fixed charges,
earnings are defined as income from continuing operations before income
taxes plus fixed charges. Fixed charges consist of interest expense,
including amortization of debt issuance costs and that portion of rental
expenses on operating leases that management considers to be a reasonable
approximation of interest.
DESCRIPTION OF DEBT SECURITIES
The following description sets forth some general terms and provisions of
the debt securities we may offer, but is not complete. The particular terms of
the debt securities offered, and the extent to which the general provisions may
or may not apply to the debt securities so offered, will be described in the
prospectus supplement relating to the particular debt securities. For a more
detailed description of the terms of the debt securities, please refer to the
indenture, as supplemented by the applicable supplemental indenture or
authorizing resolution, as the case may be, relating to the issuance of the
particular debt securities.
Any senior debt securities will be issued under a senior indenture to be
entered into between us and the trustee named in the senior indenture. Any
subordinated debt securities will be issued under a subordinated indenture to
be entered into between us and the trustee named in the subordinated indenture.
As used in this registration statement, the term "indentures" refers to both
the senior indenture and the subordinated indenture. The indentures will be
qualified under the Trust Indenture Act of 1939, as amended. As used in this
registration statement, the term "debt trustee" refers to either the senior
trustee or the subordinated trustee, as applicable.
The following summarizes some material provisions of the senior debt
securities, the subordinated debt securities and the indentures, and is
qualified in its entirety by reference to all the provisions of the indenture
and any applicable supplemental indenture or authorizing resolution, as the
case may be, relating to a particular series of debt securities, including the
definitions therein of some terms. Except as otherwise indicated, the terms of
any senior indenture and subordinated indenture will be identical.
3
GENERAL
If applicable, each prospectus supplement and the applicable supplemental
indenture or authorizing resolution, as the case may be, will describe the
following terms relating to a series of debt securities:
o the title of the debt securities;
o whether the debt securities are senior debt securities or subordinated
debt securities and, if subordinated, the terms of subordination;
o any limit on the amount of debt securities that may be issued;
o whether any of the debt securities will be issuable, in whole or in
part, in temporary or permanent global form or in the form of
book-entry securities;
o the maturity dates of the debt securities;
o the annual interest rates (which may be fixed or variable) or the
method for determining the rates and the dates interest will begin to
accrue on the debt securities, the dates interest will be payable and
the regular record dates for interest payment dates or the method for
determining the dates;
o the places where payments with respect to the debt securities shall be
payable;
o our right, if any, to defer payment of interest on the debt securities
and the maximum length of any deferral period;
o the date, if any, after which, and the prices at which, the series of
debt securities may, pursuant to any optional redemption provisions,
be redeemed at our option and other related terms and provisions;
o the dates, if any, on which, and the prices at which we are obligated,
pursuant to any mandatory sinking fund provisions or otherwise, to
redeem, or at the holder's option to purchase, the series of debt
securities and other related terms and provisions;
o the denominations in which the series of debt securities will be
issued, if other than denominations of $1,000 and any integral
multiple thereof;
o any mandatory or optional sinking fund or similar provisions with
respect to the debt securities;
o the currency or currency units of payment of the principal of,
premium, if any, and interest on the debt securities;
o any index used to determine the amount of payments of the principal
of, premium, if any, and interest on the debt securities and the
manner in which the amounts shall be determined;
o the terms pursuant to which the debt securities are subject to
defeasance; and
o any other terms (which terms may be inconsistent with the applicable
indenture but shall not violate the Trust Indenture Act) of the debt
securities.
Under the indentures, we will have the ability, in addition to the ability
to issue debt securities with terms different from those of debt securities
previously issued, to reopen a previous issue of a series without the consent
of the holders of debt securities and issue additional debt securities of that
series, unless the reopening was restricted when the series was created, in an
aggregate principal amount determined by us.
4
CONVERSION OR EXCHANGE RIGHTS
The terms, if any, on which a series of debt securities may be convertible
into or exchangeable for common units or other of our securities will be
detailed in the prospectus supplement and the supplemental indenture or
authorizing resolution, as the case may be, relating thereto. The terms will
include provisions as to whether conversion or exchange is mandatory, at the
option of the holder or at our option, and may include provisions pursuant to
which the number of common units or other of our securities to be received by
the holders of the series of debt securities would be subject to adjustment.
CONSOLIDATION, MERGER OR SALE
Unless otherwise noted in a prospectus supplement and the applicable
supplemental indenture or authorizing resolution, as the case may be, the
indentures will not contain any covenant which restricts our ability to merge
or consolidate, or sell, convey, transfer or otherwise dispose of all or
substantially all of our assets. However, any successor or acquirer of the
assets must assume all of our obligations under the indentures or the debt
securities, as appropriate.
EVENTS OF DEFAULT UNDER THE INDENTURES
Unless otherwise noted in a prospectus supplement and the applicable
supplemental indenture or authorizing resolution, as the case may be, the
following will be events of default under the indentures with respect to any
series of debt securities issued:
o failure to pay interest on the debt securities when due and the
failure continues for 30 days and the time for payment has not been
extended or deferred;
o failure to pay the principal or premium of the debt securities, if
any, when due;
o failure to deposit any sinking fund payment, when due, for any debt
security and, in the case of the subordinated indenture, whether or
not the deposit is prohibited by the subordination provisions;
o failure to observe or perform any other covenant contained in the debt
securities or the indentures other than a covenant specifically
relating to another series of debt securities, and the failure
continues for 60 days after we receive notice from the debt trustee or
holders of at least 25% in aggregate principal amount of the
outstanding debt securities of that series;
o if the debt securities are convertible into common units or other of
our securities, failure by us to deliver common units or other
securities when the holder or holders of the debt securities elect to
convert the debt securities into common units or other of our
securities; and
o certain events of bankruptcy, insolvency or reorganization with
respect to us.
The supplemental indenture or authorizing resolution, as the case may be,
or the form of note for a particular series of debt securities may include
additional events of default or changes to the events of default described
above. For any additional or different events of default applicable to a
particular series of debt securities, see the prospectus supplement relating to
the series.
If an event of default with respect to debt securities of any series
occurs and is continuing, the debt trustee or the holders of at least 25% in
aggregate principal amount of the outstanding debt securities of that series,
by notice in writing to us (and to the debt trustee if notice is given by the
holders), may declare the unpaid principal, premium, if any, and accrued
interest, if any, due and payable immediately.
The holders of a majority in principal amount of the outstanding debt
securities of an affected series may waive any default or event of default with
respect to the series and its consequences, except defaults or events of
default regarding payment of principal, premium, if any, or interest on the
debt securities. Any waiver shall cure the default or event of default.
Subject to the terms of the indentures, as supplemented by any applicable
supplemental indenture or authorizing resolution, if an event of default under
an indenture shall occur and be
5
continuing, the debt trustee will be under no obligation to exercise any of its
rights or powers under the indenture at the request or direction of any of the
holders of the applicable series of debt securities, unless the holders have
offered the debt trustee reasonable indemnity. The holders of a majority in
principal amount of the outstanding debt securities of any series will have the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the debt trustee, or exercising any trust or power
conferred on the debt trustee, with respect to the debt securities of that
series, provided that:
o it is not in conflict with any law or the applicable indenture;
o the debt trustee may take any other action deemed proper by it which
is not inconsistent with the direction; and
o subject to its duties under the Trust Indenture Act of 1939, the debt
trustee need not take any action that might involve it in personal
liability or might be unduly prejudicial to the holders not involved
in the proceeding.
A holder of the debt securities of any series will only have the right to
institute a proceeding under the indentures or to appoint a receiver or
trustee, or to seek other remedies, if:
o the holder has given written notice to the debt trustee of a
continuing event of default with respect to that series;
o the holders of at least 25% in aggregate principal amount of the
outstanding debt securities of that series have made written request,
and the holders have offered reasonable indemnity to the debt trustee
to institute proceedings; and
o the debt trustee does not institute a proceeding, and does not receive
from the holders of a majority in aggregate principal amount of the
outstanding debt securities of that series other, conflicting
directions within 60 days after the notice, request and offer.
These limitations will not apply to a suit instituted by a holder of debt
securities if we default in the payment of principal, premium, if any, or
interest on the debt securities.
We will periodically file statements with the debt trustee regarding our
compliance with certain of the covenants in the indentures.
MODIFICATION OF INDENTURE; WAIVER
We and the debt trustee may change an indenture without the consent of any
holders with respect to specific matters, including:
o to fix any ambiguity, defect or inconsistency in an indenture;
o to change anything that does not materially adversely affect the
interests of any holder of debt securities of any series;
o to provide for the assumption by a successor person or the acquirer of
all or substantially all of our assets of our obligations under such
indenture;
o to evidence and provide for successor debt trustees;
o to add, change or eliminate any provision affecting only debt
securities not yet issued; and
o to comply with any requirement of the SEC in connection with
qualification of an indenture under the Trust Indenture Act of 1939.
In addition, unless otherwise noted in a prospectus supplement and the
applicable supplemental indenture or authorizing resolution, as the case may
be, under the indentures, the rights of holders of a series of debt securities
may be changed by us and the debt trustee with the written consent of the
holders of at least a majority in aggregate principal amount of the outstanding
debt securities of each series that is affected. However, unless otherwise
noted in a prospectus supplement and the applicable supplemental indenture or
authorizing resolution, as the case may be, the following changes may only be
made with the consent of each holder of any outstanding debt securities
affected:
6
o extend the fixed maturity of any debt security of the series;
o reduce the principal amount or reduce the rate of, or extend the time
of payment of, interest, or any premium payable upon the redemption of
any debt securities;
o change any obligation of ours to pay additional amounts with respect
to the debt securities;
o reduce the amount of principal of any debt security payable upon
acceleration of the maturity thereof;
o change the currency in which any debt security or any premium or
interest is payable;
o impair the right to enforce any payment on or with respect to any debt
security;
o adversely change the right to convert or exchange, including
decreasing the conversion rate or increasing the conversion price of,
the debt security (if applicable);
o reduce the percentage in principal amount of outstanding debt
securities of any series, the consent of whose holders is required for
modification or amendment of the applicable indenture or for waiver of
compliance with certain provisions of the applicable indenture or for
waiver of certain defaults; or
o modify any of the above provisions.
FORM, EXCHANGE AND TRANSFER
The debt securities of each series will be issuable only in fully
registered form without coupons and, unless otherwise specified in the
applicable prospectus supplement and the supplemental indenture or authorizing
resolution, as the case may be, in denominations of $1,000 and any integral
multiple thereof. The indentures will provide that debt securities of a series
may be issuable in temporary or permanent global form and may be issued as
book-entry securities that will be deposited with, or on behalf of, The
Depository Trust Company or another depositary named by us and identified in a
prospectus supplement with respect to the series.
At the option of the holder, subject to the terms of the indentures, as
supplemented by applicable supplemental indentures or authorizing resolutions,
as the case may be, and the limitations applicable to global securities
described in the applicable prospectus supplement, debt securities of any
series will be exchangeable for other debt securities of the same series, in
any authorized denomination and of like tenor and aggregate principal amount.
Subject to the terms of the indentures, as supplemented by applicable
supplemental indentures or authorizing resolutions, as the case may be, and the
limitations applicable to global securities detailed in the applicable
prospectus supplement, debt securities may be presented for exchange or for
registration of transfer (duly endorsed or with the form of transfer endorsed
thereon duly executed if so required by us or the security registrar) at the
office of the security registrar or at the office of any transfer agent
designated by us for that purpose. Unless otherwise provided in the debt
securities to be transferred or exchanged, no service charge will be made for
any registration of transfer or exchange, but we may require payment of any
taxes or other governmental charges. The security registrar and any transfer
agent (in addition to the security registrar) initially designated by us for
any debt securities will be named in the applicable prospectus supplement. We
may at any time designate additional transfer agents or rescind the designation
of any transfer agent or approve a change in the office through which any
transfer agent acts, except that we will be required to maintain a transfer
agent in each place of payment for the debt securities of each series.
INFORMATION CONCERNING THE DEBT TRUSTEE
The debt trustee, other than during the occurrence and continuance of an
event of default under an indenture, undertakes to perform only the duties
specifically detailed in the indentures and, upon an event of default under an
indenture, must use the same degree of care as a prudent person would exercise
or use in the conduct of his or her own affairs. Subject to this provision, the
debt
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trustee is under no obligation to exercise any of the powers given it by the
indentures at the request of any holder of debt securities unless it is offered
reasonable security and indemnity against the costs, expenses, and liabilities
that it might incur. The debt trustee is not required to spend or risk its own
money or otherwise become financially liable while performing its duties unless
it reasonably believes that it will be repaid or receive adequate indemnity.
PAYMENT AND PAYING AGENTS
Unless otherwise indicated in the applicable prospectus supplement and the
supplemental indenture or authorizing resolution, as the case may be, payment
of the interest on any debt securities on any interest payment date will be
made to the person in whose name the debt securities (or one or more
predecessor securities) are registered at the close of business on the regular
record date for the payment of interest.
Principal of and any premium and interest on the debt securities of a
particular series will be payable at the office of the paying agents designated
by us, except that unless otherwise indicated in the applicable prospectus
supplement and the supplemental indenture or authorizing resolution, as the
case may be, interest payments may be made by check mailed to the holder.
Unless otherwise indicated in the prospectus supplement, the corporate trust
office of the debt trustee will be designated as our sole paying agent for
payments with respect to debt securities of each series. Any other paying
agents initially designated by us for the debt securities of a particular
series will be named in the applicable prospectus supplement. We will be
required to maintain a paying agent in each place of payment for the debt
securities of a particular series.
All moneys paid by us to a paying agent or the debt trustee for the
payment of the principal of or any premium or interest on any debt securities
which remains unclaimed at the end of two years after the principal, premium,
or interest has become due and payable will be repaid to us, and the holder of
the security thereafter may look only to us for payment thereof.
GOVERNING LAW
The indentures and the debt securities will be governed by and construed
in accordance with the laws of the State of New York, but without giving effect
to applicable principles of conflicts of law to the extent that the application
of the law of another jurisdiction would be required thereby.
DESCRIPTION OF COMMON UNITS
GENERAL
The common units represent limited partner interests that entitle the
holders to participate in distributions and exercise the rights and privileges
available to limited partners under our partnership agreement.
NUMBER OF UNITS
As of September 30, 2003, we had 27,256,162 common units outstanding.
Suburban Energy Services Group LLC, our general partner, owns a combined 1.71%
general partner interest in us and our operating partnership.
Under our partnership agreement we may issue, without further unitholder
action, an unlimited number of additional limited partner interests and other
equity securities with such rights, preferences and privileges as shall be
established by our Board of Supervisors in its sole discretion, including
securities that may have special voting rights to which holders of common units
are not entitled.
LISTING
Our common units are listed on the New York Stock Exchange under the
symbol "SPH."
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VOTING
Each outstanding common unit is entitled to one vote. However, if at any
time, any person or group, including our general partner and its affiliates,
owns beneficially more than 20% of all common units, any common units owned by
that person or group in excess of 20% may not be voted on any matter and will
not be considered to be outstanding when sending notices of a meeting of
unitholders, calculating required votes, determining the presence of a quorum
or for other similar purposes under our partnership agreement, unless otherwise
required by law. We hold a meeting of the limited partners every three years to
elect our Board of Supervisors and to vote on any other matters that are
properly brought before the meeting.
CASH DISTRIBUTIONS
Our partnership agreement requires us to distribute all of our "available
cash" to our unitholders and our general partner within 45 days following the
end of each fiscal quarter based on the priorities described below. "Available
cash" generally means, with respect to any fiscal quarter, all of our cash on
hand at the end of that quarter, less reserves necessary or appropriate, in the
discretion of our Board of Supervisors, to provide for the proper conduct of
our business, to comply with applicable law or agreements, or to provide funds
for future distributions to partners.
Distributions of available cash may be made either from "operating
surplus" or from "capital surplus."
"Operating surplus" generally means (A) our cash balance on the date we
commenced operations, plus $40 million, plus all cash receipts from our
operations, including working capital borrowings but excluding cash receipts
from interim capital transactions (as defined below), minus (B) all of our
operating expenses, debt service payments, including reserves, but not
including payments required in connection with the sale of assets or any
refinancing with the proceeds of new indebtedness or an equity offering,
maintenance capital expenditures and reserves established for our future
operations, in each case, since we commenced operations. "Interim capital
transactions" generally include borrowings and sales of debt securities, other
than for working capital purposes, sales of equity interests and sales or other
dispositions of assets, other than inventory, accounts receivable and other
current assets in the ordinary course of business.
All available cash distributed will be treated as distributed from
operating surplus until the sum of all available cash distributed since we
commenced operations equals operating surplus as of the end of the quarter
prior to that distribution. Therefore, capital surplus generally means any
amounts of available cash that we distribute after distributing our available
cash from operating surplus. Historically, we have not made any distributions
of available cash from capital surplus and do not expect to do so in the
foreseeable future.
Available cash from operating surplus with respect to any quarter is
distributed as follows:
o first, 98.29% to common unitholders, pro rata, and 1.71% to the
general partner, until all common unitholders have received the
minimum quarterly distribution of $0.50 per unit, and an amount equal
to the excess of the target distribution of $0.55 per unit over the
minimum quarterly distribution; and
o thereafter, 84.98% to all common unitholders, pro rata, 13.31% to the
general partner pursuant to its incentive distribution rights and
1.71% to the general partner in respect of its general partnership
interest;
provided, however, that in the event we do not pay such minimum quarterly
distribution, then we will not be required to pay any arrearages in respect of
such distribution period.
The target distributions discussed in the first bullet above will be
proportionately adjusted in the event of any combination or subdivision of
common units. In addition, if a distribution is made of available cash
constituting cash from interim capital transactions, the target distributions
will also be adjusted proportionately downward to equal the product resulting
from multiplying each of them by a fraction, of which the numerator shall be
the unrecovered capital immediately after giving effect to
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such distribution and the denominator shall be the unrecovered capital
immediately before such distribution. For these purposes, "unrecovered capital"
means the amount by which $20.50 exceeds the aggregate per unit distributions
of cash from interim capital transactions on the common units. If and when the
unrecovered capital is zero, the target distributions each will have been
reduced to zero.
The target distributions may also be adjusted if legislation is enacted
that causes us to become taxable as a corporation or to be treated as an
association taxable as a corporation for federal income tax purposes. In that
event, the target distributions for each quarter after this event would be
reduced to an amount equal to the product of each of the target distributions
multiplied by one minus the sum of:
(1) the maximum marginal federal corporate income tax rate, plus
(2) the effective overall state and local income tax rate applicable to us
for the taxable year in which the quarter occurs (after taking into account the
benefit of any deduction allowable for federal income tax purposes with respect
to the payment of state and local taxes).
Our general partner currently owns all incentive distribution rights, but
has the right to transfer them freely. Incentive distribution rights are
non-voting limited partner interests that confer upon the holder the right to
receive certain cash distributions as described above. Our Board of
Supervisors, with the approval of a majority of the elected supervisors, has
the option, exercisable beginning in May 2004, to cause all the incentive
distribution rights to be converted into a number of common units having a
value equal to the fair market value of the incentive distribution rights.
TRANSFER RESTRICTIONS
Common units are securities and are transferable according to the laws
governing transfer of securities. Until a common unit has been transferred on
our books, we will treat the record holder as the absolute owner for all
purposes. Transfers of common units will not be recorded by the transfer agent
or recognized by us until the transferee executes and delivers a transfer
application. A purchaser or transferee of common units who does not execute and
deliver a transfer application will not receive cash distributions, unless the
common units are held in nominee or "street" name and the nominee or broker has
executed and delivered a transfer application with respect to the common units,
and may not receive federal income tax information and reports furnished to
record holders of common units. Our Board of Supervisors has the discretion to
withhold its consent to accepting any such purchaser or transferee of our
common units as a substitute limited partner. If the consent is withheld, the
purchaser or transferee of the common units will be an assignee and will have
an interest equivalent to that of a limited partner with respect to allocations
and distributions, including liquidation distributions. In addition, the
general partner will vote such common units at the direction of the assignee
who is the record holder of the common units.
TRANSFER AGENT AND REGISTRAR
Our transfer agent and registrar for the common units is Equiserve Trust
Company, N.A. Their address is P.O. Box 43069, Providence, Rhode Island 02940.
OUR PARTNERSHIP AGREEMENT
ORGANIZATION
We are a Delaware limited partnership. Our general partner is Suburban
Energy Services Group LLC, an entity owned by approximately 40 of our
executives and other key employees.
BOARD OF SUPERVISORS
Generally, our business is managed by, or under the direction of, our
Board of Supervisors. The Board of Supervisors is comprised of five persons, of
whom two are appointed by our general partner in its sole discretion and three
are elected by the holders of a plurality of the outstanding common
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units present and voting, in person or by proxy, at the meeting of unitholders
held every three years, which we refer to as the tri-annual meeting. A majority
of the supervisors in office constitutes a quorum and a majority of a quorum is
needed to adopt a resolution or take any other action. Each member of the Board
of Supervisors serves for a term of three years. An elected supervisor may not
be an employee, officer, director or affiliate of our general partner.
The Board of Supervisors nominates individuals to stand for election as
elected supervisors at a tri-annual meeting of our limited partners. In
addition, any limited partner or group of limited partners that holds
beneficially 10% or more of the outstanding common units is entitled to
nominate one or more individuals to stand for election as elected supervisors
at the tri-annual meeting by providing written notice to the Board of
Supervisors not more than 120 days nor less than 90 days prior to the meeting.
However, if the date of the tri-annual meeting is not publicly announced by us
at least 100 days prior to the date of the meeting, the notice must be
delivered to the Board of Supervisors not later than ten days following the
public announcement of the meeting date. The notice must set forth:
o the name and address of the limited partner or limited partners making
the nomination or nominations;
o the number of common units beneficially owned by the limited partner
or limited partners;
o the information regarding the nominee(s) proposed by the limited
partner or limited partners as required to be included in a proxy
statement relating to the solicitation of proxies for the election of
directors filed pursuant to the proxy rules of the SEC;
o the written consent of the nominee(s) to serve as a member of the
Board of Supervisors if so elected; and
o a certification that the nominee(s) qualify as elected supervisors.
The general partner may remove an appointed supervisor with or without
cause at any time. "Cause" generally means a court's finding a person liable
for actual fraud, gross negligence or willful or wanton misconduct in his or
her capacity as a supervisor. Any and all of the elected supervisors may be
removed at any time with cause by the affirmative vote of a majority of the
elected supervisors and with or without cause, at a properly called meeting of
the limited partners by the affirmative vote of the holders of a majority of
the outstanding common units. If any appointed supervisor is removed, resigns
or is otherwise unable to serve as a supervisor, the general partner may fill
the vacancy. If any elected supervisor is removed, resigns or is otherwise
unable to serve as a supervisor, the vacancy may be filled by a majority of the
elected supervisors then serving (or, if no elected supervisors are then
serving, by a majority of the supervisors then serving).
OFFICERS
The Board of Supervisors has the authority to appoint our officers. The
Board of Supervisors may also designate one of its members as its chairman
and/or vice chairman, who is automatically deemed an officer. Our officers
include a president, one or more vice presidents, a treasurer and a secretary,
and may include one or more assistant secretaries and assistant treasurers and
other officers. Each of our officers has basic authority by virtue of being
appointed an officer and may be further authorized from time to time by the
Board of Supervisors to take any additional action that the Board of
Supervisors delegates to that officer. The general partner has agreed to take
any and all action necessary and appropriate to give effect to any duly
authorized actions of the Board of Supervisors or any officer, including
executing or filing any agreements, instruments or certificates.
MEETINGS; VOTING
Common unitholders are entitled to vote at all meetings of limited
partners and to act with respect to all matters as to which their approval may
be solicited. Each common unit is entitled to one vote. With respect to voting
rights attributable to common units that are owned by an assignee who is a
record holder but who has not yet been admitted as a limited partner, the
general partner is deemed to be the limited partner with respect to that
assignee and, in exercising the voting rights in
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respect of those common units on any matter, must vote those common units at
the written direction of the record holder. Absent direction from the record
holders, those common units will not be voted, except that, in the case of
common units held by the general partner on behalf of non-citizen assignees,
the general partner must allocate the votes in respect of those common units in
the same ratios as the votes of limited partners in respect of other common
units are cast. Every three years, there is a meeting of the limited partners
to elect the elected members of the Board of Supervisors. In addition, a
special meeting of limited partners may be called by the Board of Supervisors
or by limited partners owning in the aggregate at least 20% of the outstanding
common units. Any action that is required or permitted to be taken by the
limited partners may be taken either at a meeting of the limited partners or,
if authorized by the Board of Supervisors, without a meeting if consents in
writing setting forth the action so taken are signed by holders of the number
of limited partner interests as would be necessary to authorize or take the
action at a meeting of the limited partners. Limited partners may vote either
in person or by proxy at meetings.
The holders of a majority of the outstanding common units represented in
person or by proxy will constitute a quorum at a meeting of common unitholders,
unless any action by the common unitholders requires approval by holders of a
greater percentage of common units, in which case the quorum shall be the
greater required percentage. In the case of elections for elected supervisors,
any person and its affiliates, including the general partner, that own more
than 20% of the total common units then outstanding may vote not more than 20%
of the total units then outstanding in the election. Additional limited partner
interests having special voting rights could be issued by us in the future. Our
partnership agreement provides that common units held in nominee or street name
account will be voted by the broker or other nominee pursuant to the
instruction of the beneficial owner unless the arrangement between the
beneficial owner and his nominee provides otherwise. Any notice, demand,
request, report or proxy material required or permitted to be given or made to
record holders of common units, whether or not the record holder has been
admitted as a limited partner, under the terms of the partnership agreement
will be delivered to the record holder.
NON-CITIZEN ASSIGNEES; REDEMPTION
If we are or become subject to federal, state or local laws or regulations
that, in the reasonable determination of our Board of Supervisors, create a
substantial risk of cancellation or forfeiture of any property in which we have
an interest because of the nationality, citizenship, residency or other related
status of any limited partner or assignee, we may redeem the common units held
by that limited partner or assignee at their current market price. In order to
avoid any cancellation or forfeiture, the Board of Supervisors may require each
limited partner or assignee to furnish information about his nationality,
citizenship, residency or related status. If a limited partner or assignee
fails to furnish information about nationality, citizenship, residency or other
related status within 30 days after a request for that information, that
limited partner or assignee may be treated as a non-citizen assignee. In
addition to other limitations on the rights of an assignee who is not a
substituted limited partner, a non-citizen assignee does not have the right to
direct the voting of his common units and may not receive distributions in kind
upon liquidation.
TRANSFER OF GENERAL PARTNER INTERESTS AND INCENTIVE DISTRIBUTION RIGHTS
Our general partner may not transfer all or any part of its aggregate
general partner interest in us or in our operating partnership to another
person prior to September 30, 2006, without the approval of the holders of at
least a majority of the outstanding common units. However, the general partner
may, without the approval of the holders of the common units, transfer all of
its general partner interest in us or in our operating partnership to (1) an
affiliate of the general partner or (2) another person in connection with the
merger or consolidation of the general partner with or into another person or
the transfer by the general partner of all or substantially all of its assets
to another person. In each case, any transferee must assume the rights and
duties of the general partner, agree to be bound by the provisions of the
partnership agreement, furnish an opinion of counsel acceptable to the Board of
Supervisors, agree to acquire all, or the appropriate portion, as applicable,
of the general partner's interests in our operating partnership and agree to be
bound by the provisions of the partnership agreement for the operating
partnership.
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The general partner has the right at any time to transfer its incentive
distribution rights to one or more persons, as an assignment of these rights or
as a special limited partner interest, subject only to any reasonable
restrictions on transfer and requirements for registering the transfer of the
rights as may be adopted by the Board of Supervisors. However, no restrictions
or requirements that adversely affect the holders of the incentive distribution
rights in any material respect may be adopted without the approval of the
holders of at least a majority of the incentive distribution rights. At any
time, the owners of interests in the general partner may sell or transfer all
or part of their interests in the general partner to an affiliate or a third
party without the approval of the common unitholders.
WITHDRAWAL OR REMOVAL OF THE GENERAL PARTNER
Our general partner has agreed not to withdraw voluntarily as general
partner prior to September 30, 2006, with limited exceptions described below,
without obtaining the approval of the holders of at least a majority of the
outstanding common units and furnishing an opinion of counsel. On or after
September 30, 2006, our general partner may withdraw without first obtaining
approval from any common unitholder by giving 90 days' written notice. In any
event, our general partner may withdraw without common unitholder approval upon
90 days' notice to the limited partners if at least 50% of the outstanding
common units are held or controlled by one person and its affiliates, other
than our general partner and its affiliates. In addition, the partnership
agreement permits our general partner, in limited instances, to sell or
otherwise transfer all of its general partner interests without the approval of
the common unitholders. For details regarding the transfer of the general
partner's interest, see "Transfer of General Partner Interests and Incentive
Distribution Rights," above.
Upon the withdrawal of our general partner under any circumstances, other
than as a result of a transfer by our general partner of all or a part of its
general partner interest, the holders of at least a majority of the outstanding
common units may select a successor to the withdrawing general partner. If a
successor is not elected, or is elected but an opinion of counsel cannot be
obtained, we will be dissolved, wound up and liquidated, unless within 180 days
after the withdrawal the holders of at least a majority of the outstanding
common units agree in writing to continue our business and to the appointment
of a successor general partner.
Our general partner may not be removed unless the removal is approved by
the vote of the holders of at least a majority of the outstanding common units
and we receive an opinion of counsel. Any removal is also subject to the
approval of a successor general partner by the vote of the holders of at least
a majority of the outstanding common units. The partnership agreement also
provides that if our general partner is removed without cause and units held by
the general partner and its affiliates are not voted in favor of the removal,
the general partner will have the right to convert its general partner
interests and all of its incentive distribution rights into common units or to
receive cash in exchange for those interests. Withdrawal or removal of our
general partner also constitutes its withdrawal or removal, as the case may be,
as the general partner of our operating partnership. In the event of withdrawal
of our general partner that violates the partnership agreement, a successor
general partner will have the option to purchase the general partner interest
of the departing general partner and all of its incentive distribution rights
for a cash payment equal to the fair market value of those interests.
Under all other circumstances where our general partner withdraws or is
removed by the limited partners, the departing general partner will have the
option to require the successor general partner to purchase the general partner
interest of the departing general partner and the incentive distribution rights
for their fair market value. In each case, fair market value will be determined
by agreement between the departing general partner and the successor general
partner, or, if no agreement is reached, by an independent investment banking
firm or other independent experts selected by the departing general partner and
the successor general partner, or if no expert can be agreed upon, by an expert
chosen by agreement of the experts selected by each of them. In addition, we
will be required to reimburse the departing general partner for all amounts due
the departing general partner, including all employee-related liabilities,
including severance liabilities, incurred in connection with the termination of
any employees employed by the departing general partner for our benefit.
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If the above-described option is not exercised by either the departing
general partner or the successor general partner, as applicable, the departing
general partner will have the right to convert its general partner interests in
us and our operating partnership, as well as its incentive distribution rights,
into common units equal to the fair market value of those interests as
determined by an investment banking firm or other independent expert selected
in the manner described in the preceding paragraph or to receive cash in
exchange for those interests. Any successor general partner will be deemed to
have irrevocably delegated to the Board of Supervisors the authority to manage,
or direct the management of, our affairs to the same extent as the departing
general partner.
AMENDMENT OF PARTNERSHIP AGREEMENT
Amendments to the partnership agreement may be proposed only by or with
the consent of the Board of Supervisors. In order to adopt a proposed
amendment, we are, in general, required to seek written approval of the holders
of the number of common units required to approve the amendment or call a
meeting of the common unit-holders to consider and vote upon the proposed
amendment. However, there are some exceptions to this general rule. First,
there are some types of amendments that are prohibited by the partnership
agreement. Second, there are some types of amendments that can be made by our
Board of Supervisors without approval by the common unit-holders. Generally,
the types of amendments that can be made without unitholder approval are those
that will not adversely affect the limited partners in any material respect.
LIMITED CALL RIGHT
If at any time less than 20% of the then-issued and outstanding limited
partner interests of any class are held by persons other than our general
partner and its affiliates, our general partner will have the right, which it
may assign in whole or in part to any of its affiliates or to us, to acquire
all, but not less than all, of the remaining limited partner interests of that
class held by those unaffiliated persons as of a record date to be selected by
the general partner on at least 10 but not more than 60 days' prior notice. The
purchase price for a purchase of this kind will be the greater of:
o the highest price paid by the general partner or any of its affiliates
for any limited partner interests of that class purchased within the
90 days preceding the date on which the general partner first mails
notice of its election to purchase such limited partner interests, and
o the current market price as of the date three days prior to the date
the notice is mailed.
As a consequence of the general partner's right to purchase outstanding
limited partner interests, a holder of limited partner interests may have his
or her limited partner interests purchased even though he or she does not
desire to sell them, or the price paid may be less than the amount the holder
would desire to receive upon the sale of those limited partner interests. The
tax consequences to a common unitholder of the exercise of this call right are
the same as those applicable to a sale in the open market.
REGISTRATION RIGHTS
Pursuant to the terms of the partnership agreement, we have agreed,
subject to some limitations, to register for resale under the Securities Act of
1933 and applicable state securities laws any of our common units or other
securities proposed to be sold by our general partner or any of its affiliates
if an exemption from the registration requirements of those laws is not
otherwise available for the proposed sale. We have agreed to bear all expenses
incidental to that registration and sale, excluding underwriting discounts and
commissions.
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TAX CONSIDERATIONS
The prospectus supplement applicable to each type or series of securities
we offer will contain a description of the material tax considerations that may
be relevant to prospective security holders. Prior to making a decision about
investing in our securities, you should carefully consider the description
under the heading "Tax Considerations" in the applicable prospectus supplement,
together with all of the other information contained in the prospectus
supplement or appearing or incorporated by reference in this prospectus.
PLAN OF DISTRIBUTION
We may sell the securities:
o through underwriters or dealers;
o through agents;
o directly to purchasers; or
o through a combination of any such methods of sale.
Any underwriter, dealer or agent may be deemed to be an underwriter within
the meaning of the Securities Act. The prospectus supplement relating to any
offering of securities will set forth its offering terms, including the name or
names of any underwriters, the purchase price of the securities and the
proceeds to us from such sale, any underwriting discounts, commissions and
other items constituting underwriters' compensation, any initial public
offering price, and any underwriting discounts, commissions and other items
allowed or reallowed or paid to dealers, and any securities exchanges on which
the securities may be listed. Only underwriters so named in the prospectus
supplement are deemed to be underwriters in connection with the corresponding
securities offered hereby.
If underwriters are used in the sale, they will acquire the securities for
their own account and may resell them from time to time in one or more
transactions, at a fixed price or prices, which may be changed, or at market
prices prevailing at the time of sale, or at prices related to such prevailing
market prices, or at negotiated prices. The securities may be offered to the
public either through underwriting syndicates represented by one or more
managing underwriters or directly by one or more of such firms. Unless
otherwise set forth in the prospectus supplement, the obligations of the
underwriters to purchase the securities will be subject to certain conditions
precedent and the underwriters will be obligated to purchase all the offered
securities if any are purchased. Any initial public offering price and any
discounts or concessions allowed or reallowed or paid to dealers may be changed
from time to time.
Any agent involved in the offer or sale of the securities in respect of
which this prospectus is delivered will be named, and any commissions payable
by us to the agent will be set forth, in the accompanying prospectus
supplement. Unless otherwise indicated in the prospectus supplement, any such
agent will be acting on a best efforts basis for the period of its appointment.
If so indicated in the prospectus supplement, we will authorize
underwriters, dealers or agents to solicit offers by certain specified
institutions to purchase securities from us at the public offering price set
forth in the accompanying prospectus supplement pursuant to delayed delivery
contracts providing for payment and delivery on a specified date in the future.
These contracts will be subject to any conditions set forth in the accompanying
prospectus supplement and the prospectus supplement will set forth the
commission payable for solicitation of these contracts. The underwriters and
other persons soliciting these contracts will have no responsibility for the
validity or performance of any such contracts.
Securities offered may be a new issue of securities with no established
trading market. Any underwriters to whom or agents through whom these
securities are sold by us for public offering and sale may make a market in
these securities, but such underwriters or agents will not be obligated to do
so and may discontinue any market making at any time without notice. No
assurance can be given as to the liquidity of or the trading market for any
such securities.
15
Underwriters, dealers and agents may be entitled, under agreements entered
into with us, to indemnification by us against certain civil liabilities,
including liabilities under the Securities Act or to contribution by us to
payments they may be required to make in respect thereof.
Certain of the underwriters, agents or dealers and their associates may be
customers of, or engage in transactions with and perform services for us in the
ordinary course of business.
LEGAL MATTERS
Certain legal matters in connection with the validity of our securities
will be passed upon for us by Cahill Gordon & Reindel LLP, New York, New York.
EXPERTS
The financial statements of Suburban Propane Partners, L.P. incorporated
in this prospectus by reference to our Annual Report on Form 10-K for the
fiscal year ended September 28, 2002 have been so incorporated in reliance on
the report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting. The financial
statements of Suburban Energy Services Group LLC incorporated in this
prospectus by reference to our Annual Report on Form 10-K for the fiscal year
ended September 28, 2002 have been so incorporated in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
16
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No dealer, salesperson or other person is authorized to give any information or
to represent anything not contained in this prospectus supplement or the
accompanying prospectus. You must not rely on any unauthorized information or
representations. This prospectus supplement is an offer to sell only the
securities offered hereby, but only under circumstances and in jurisdictions
where it is lawful to do so. The information contained in this prospectus
supplement and the accompanying prospectus is current only as of the dates on
their respective covers.
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TABLE OF CONTENTS
Prospectus Supplement
Page
-----
Prospectus Supplement Summary ................ S-1
Risk Factors ................................. S-10
Use of Proceeds .............................. S-19
Price Range of Common Units and Cash
Distributions ............................. S-20
Capitalization ............................... S-21
Suburban Selected Financial and Other
Data ...................................... S-22
Agway Energy Selected Financial and
Other Data ................................ S-24
Unaudited Pro Forma Condensed
Combined Financial Statements ............. S-26
Business ..................................... S-31
The Acquisition .............................. S-37
Management ................................... S-42
Description of Certain Indebtedness .......... S-44
Tax Considerations ........................... S-46
Investment in Common Units by
Employee Benefit Plans .................... S-60
Underwriting ................................. S-62
Legal Opinions ............................... S-63
Experts ...................................... S-63
Forward-Looking Statements ................... S-64
Prospectus
About This Prospectus ........................ 1
Where You Can Find More Information .......... 1
Incorporation of Certain Documents By
Reference ................................. 1
Forward-Looking Statements ................... 2
Our Company .................................. 2
Risk Factors ................................. 3
Use of Proceeds .............................. 3
Ratio of Earnings to Fixed Charges ........... 3
Description of Debt Securities ............... 3
Description of Common Units .................. 8
Our Partnership Agreement .................... 10
Tax Considerations ........................... 15
Plan of Distribution ......................... 15
Legal Matters ................................ 16
Experts ...................................... 16
2,600,000 Common Units
Representing Limited
Partner Interests
SUBURBAN PROPANE
PARTNERS, L.P.
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[SUBURBAN PROPANE LOGO OMITTED]
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GOLDMAN, SACHS & CO.
WACHOVIA SECURITIES
RAYMOND JAMES
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