As filed with the Securities and Exchange Commission on August 1, 2000
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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SUBURBAN PROPANE PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
DELAWARE 5984 22-3410353
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)
</TABLE>
240 ROUTE 10 WEST
WHIPPANY, NJ 07981
(973) 887-5300
(Address, including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
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JANICE G. MEOLA, ESQ.
GENERAL COUNSEL
SUBURBAN PROPANE PARTNERS, L.P.
240 ROUTE 10 WEST
WHIPPANY, NJ 07981
(973) 887-5300
(Name, address, including zip code, and telephone number,
including area code, of Agent for Service)
Copies to:
STEPHEN H. COOPER, ESQ. MICHAEL ROSENWASSER, ESQ.
WEIL, GOTSHAL & MANGES LLP VINSON & ELKINS L.L.P.
767 FIFTH AVENUE 1325 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10153 NEW YORK, NEW YORK 10019
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
NY2:\948331\06\kbqj06!.DOC\76463.0008
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If the only securities being registered on this Form are being
offered pursuant to dividend or interest reinvestment plans, please check the
following box. [ ]
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, please check the following box. [ ]
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
======================================================== ======================== ==========================
Proposed Maximum Amount of
Title of Each Class of Aggregate Offering Registration
Securities to be Registered Price(1) Fee(2)
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<S> <C> <C>
Common Units representing limited $52,500,000 $13,860
partnership interests
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(1) Estimated solely for the purpose of calculating the registration fee.
(2) The registration fee has been calculated in accordance with Rule 457(o)
under the Securities Act.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
The information in this preliminary prospectus is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This preliminary
prospectus is not an offer to sell nor does it solicit an offer to buy these
securities in any jurisdiction where the offer or sale is not permitted.
SUBJECT TO COMPLETION. DATED AUGUST 1, 2000.
2,175,000 COMMON UNITS
REPRESENTING LIMITED PARTNER INTERESTS
SUBURBAN PROPANE PARTNERS, L.P.
The common units are listed on the New York Stock Exchange under the
symbol "SPH". The last reported sale price of the units on August 1, 2000 was
$__ per unit.
See "Risk Factors" on page 4 to read about factors you should
consider before you invest in the units.
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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. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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Per Unit Total
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<S> <C> <C>
Initial price to public.............................................................. $ $
Underwriting discount................................................................ $ $
Proceeds, before expenses, to Suburban Propane Partners, L.P......................... $ $
</TABLE>
To the extent that the underwriter sells more than 2,175,000 common
units, the underwriter has the option to purchase up to an additional 325,000
units from us at the initial price to public less the underwriting discount.
--------------------
The underwriter expects to deliver the units against payment in New
York, New York on __________, 2000.
GOLDMAN, SACHS & CO.
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Prospectus dated ________ __, 2000.
<PAGE>
PROSPECTUS SUMMARY
As used in this prospectus, "we", "us", "our" and "Suburban" mean Suburban
Propane Partners, L.P. and, unless the context requires otherwise, our
subsidiary operating partnership, Suburban Propane, L.P., and our wholly owned
subsidiaries. Our subsidiary operating partnership is sometimes referred to in
this prospectus as the "Operating Partnership".
OUR BUSINESS
We are retail and wholesale marketers of propane and
related appliances and services. We believe that we are the third largest retail
marketer of propane in the United States, measured by retail gallons sold.
During the past year, we sold approximately 524 million gallons of propane to
retail customers and an additional 182.3 million gallons at wholesale to other
distributors and large industrial end-users. As of June 24, 2000, we served more
than 750,000 active residential, commercial, industrial and agricultural
customers from approximately 350 customer service centers in over 40 states. 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 three storage facilities: a
187,000,000 gallon facility in Hattiesburg, Mississippi, a 20,000,000 gallon
facility in Elk Grove, California, and a 60,000,000 storage cavern in Tirzah,
South Carolina. We are supplied by over 100 suppliers nationwide. Together with
our predecessor companies, we have been continuously engaged in the retail
propane business since 1928.
OUR STRATEGY
Our business strategy is to extend and consolidate our presence in
strategically attractive markets, primarily through the acquisition of other
propane distributors. During the past three fiscal years, we acquired 11 retail
propane distributors and one retail distributor of gas appliances, parts and
related products at a total cost of $12.0 million. In November 1999, we acquired
the propane operations of a group of affiliated companies in the southeastern
United States for a total cost of approximately $97.0 million. The operations
acquired in November 1999 included:
o a propane distributor supplying approximately 20 million
gallons annually from 22 service centers to more than 40,000
retail customers in North and South Carolina,
o a propane cylinder refurbishing and refilling center serving
approximately 1,600 grocery and convenience stores in the
Carolinas, Georgia and Tennessee,
o a 60 million gallon propane storage cavern in South Carolina,
and
o a 62-mile pipeline linking the storage cavern to the Dixie
Pipeline.
To address the seasonal nature of our business and its impact on our
earnings and cash flow, we also seek to acquire and develop related retail and
service business lines that can benefit from our infrastructure and national
presence. In February 1999, we purchased Gas Connection, Inc., a small company
with five retail stores in and around Portland, Oregon, that sells and installs
natural gas and propane gas grills, fireplaces, and related accessories and
supplies. We believe that Gas Connection provides a solid platform on which to
build a retail network that will complement our core propane operations. As of
June 24, 2000, we were operating ten Gas Connection stores and plan to open
additional stores throughout the northeast and northwest regions.
1
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In conjunction with our acquisition strategy, we continuously
evaluate our existing facilities to identify opportunities to optimize our
return on assets by selectively divesting marginally profitable operations in
slower growing markets. For example, in December 1999, we sold 23 of our service
centers, principally located in Georgia, for total cash proceeds of
approximately $19.4 million.
We are also exploring new methods to market our propane. On July 26,
2000, we announced that we would offer propane and related services to
businesses and consumers through a relationship with Essential.com, which
provides one-stop shopping for a broad range of energy and communications
services.
We also plan to continue to pursue internal growth of our existing
operations by acquiring new customers, retaining existing customers and by
selling additional products and services to our customers. We employ a
nationwide sales organization and have a comprehensive customer retention
program. By retaining more of our existing customers and continuing to seek new
customers, we believe we can increase our customer base and improve our
profitability.
We commenced operations as a limited partnership upon the completion
of our initial public offering on March 5, 1996. On May 26, 1999, we completed a
recapitalization that, among other things, resulted in the following:
o the redemption of all limited partnership interests held by
our former general partner, Suburban Propane GP, Inc., which
was a wholly-owned subsidiary of Millennium Chemicals, Inc.;
o the substitution of Suburban Energy Services Group LLC, a
management-owned entity, as our new general partner; and
o the amendment of the incentive distribution rights of the
general partner to limit our new general partner's right to
receive distributions in excess of a target quarterly
distribution level.
WHERE YOU CAN FIND US
We maintain our principal executive offices at 240 Route 10 West,
Whippany, New Jersey 07981 and our telephone number at that address is
973-887-5300.
OUR ORGANIZATIONAL STRUCTURE
Our limited partners own only a single class of limited partnership interests,
which are represented by the common units. Our general partner, Suburban Energy
Services Group LLC, is owned by approximately 45 of our executives and key
employees. Our partnership structure is intended to provide maximum benefits to
our common unitholders while aligning our management's incentives with the
interests of our unitholders. Our operations are conducted through an operating
partnership, and its corporate subsidiaries. The following chart illustrates our
organizational structure:
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Management
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|
| 100%
|
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Common Unitholders Suburban Energy
(Limited Partners) Services Group LLC
(General Partner)
------------------ ------------------
| 99.00% limited | | 1.0% general
| partner interest | | partner interest
| | |
| | |
| | |
| | |
| | |
| ------------------------------- |
---- Suburban Propane Partners, L.P. | 1.0101% general
(Master Limited Partnership) | partner interest
------------------------------- |
|
99.9899% limited |
partner interest |
|
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Operating Partnership
-------------- --------------------- -----------------------
| | |
| | |
| | |
----------------- --------------------- --------------------
Suburban Sales Suburban @ Home, Inc. Gas Connection, Inc.
and Service, Inc. (Subsidiary) (Subsidiary)
(Subsidiary)
----------------- --------------------- --------------------
3
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SUMMARY FINANCIAL DATA
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Year Ended Six Months Ended
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Sept. 27, Sept. 26, Sept. 25, March 27, March 25,
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues..............................$ 771,131 $ 667,287 $ 619,778 $ 383,194 $ 491,342
Depreciation and amortization......... 37,307 36,531 34,906 17,512 18,890
Restructuring charge.................. 6,911 - - - -
Recapitalization cost................. - - 18,903 - -
Gain on sale of assets................ - - - - 10,328
Income before interest
expenses and income taxes.......... 47,763 68,814 53,272 78,740 87,030
Interest expense, net................. 33,979 30,614 30,765 15,183 19,642
Provision for income taxes............ 190 35 68 26 92
Net Income............................ 13,594 38,165 22,439 63,531 67,296
Net Income per Unit...................$ 0.46 $ 1.30 $ 0.83 $ 2.17 $ 2.96
BALANCE SHEET DATA (END OF PERIOD)
Current assets........................$ 104,361 $ 132,781 $ 78,637 $ 171,492 $ 149,900
Total assets.......................... 745,634 729,565 659,220 760,602 805,615
Current liabilities................... 96,701 91,550 103,006 81,214 109,913
Long-term debt........................ 427,970 427,897 427,634 428,268 524,563
Other long-term liabilities........... 79,724 62,318 60,194 61,463 58,922
Partners' capital - General Partner... 12,830 24,488 2,044 25,318 2,919
Partners' capital - Limited Partners.. 128,409 123,312 66,342 164,339 109,298
STATEMENT OF CASH FLOW DATA
Cash provided by (used in)
Operating activities..................$ 58,848 $ 70,073 $ 81,758 $ 45,313 $ 15,223
Investing activities..................$ (20,709) $ 2,900 $ (12,241) $ (8,240) $ (88,372)
Financing activities..................$ (37,734) $ (32,490) $ (120,944) $ (22,050) $ 77,543
OTHER DATA
EBITDA (a)............................$ 85,070 $ 105,345 $ 88,178 $ 96,252 $ 105,920
Capital expenditures
Maintenance and growth................$ 24,888 $ 12,617 $ 11,033 $ 5,856 $ 9,372
Acquisitions..........................$ 1,880 $ 4,041 $ 4,768 $ 4,336 $ 97,684
Retail propane gallons sold........... 540,799 529,796 524,276 332,648 332,381
</TABLE>
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(a) EBITDA (earnings before interest, taxes, depreciation and amortization)
represents income before interest expense and income taxes plus
depreciation and amortization. EBITDA, which is not an alternative to
net income, is included solely because it provides additional
information for evaluating our ability to pay our minimum required
quarterly distribution.
4
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THE OFFERING
Title............................. Common units representing limited partner
interests.
Securities Offered................ 2,175,000 common units assuming the
underwriter's over-allotment option is not
exercised.
Units Outstanding after the
Offering.......................... 24,453,587 common units if the underwriter's
over-allotment option is not exercised.
If the underwriter's over-allotment is
exercised in full:
o 325,000 additional common units
will be issued; and
o 24,778,587 common units will be
outstanding.
Price............................. $_______________ for each common unit
representing a limited partner interest.
New York Stock Exchange Trading
Symbol............................ SPH
Use of Proceeds................... We estimate that we will receive
approximately $40,567,000 from the sale of
the common units, or $46,703,000 if the
underwriter's over-allotment option is
exercised in full, in each case, after
deducting the underwriting discount and
offering expenses. We intend to use the net
proceeds for general partnership purposes,
including, where appropriate opportunities
arise, future acquisitions. Pending
application for these purposes, the proceeds
will be used to reduce outstanding bank
borrowings.
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, 2004, 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, 2004, the taxable-income allocable to the unitholders will be
a much larger percentage of cash distributed to unitholders. These estimates are
based upon the assumption that our gross income from operations will approximate
the amount required to make our minimum quarterly distributions. 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.
5
<PAGE>
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. If any of the events
described in these risk factors or elsewhere in this prospectus actually occurs,
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 FINANCIAL
CONDITION IS 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.
In addition, actual weather conditions can vary substantially from
year to year, significantly affecting our financial performance. For example,
temperatures during fiscal 1999 were 8% warmer than normal and 1% warmer than
temperatures during fiscal 1998 as reported by the National Oceanic and
Atmospheric Administration. In fiscal 1999, revenues were 7.1% lower than during
fiscal 1998 principally attributable to lower product costs which resulted in
lower selling prices and, to a lesser extent, a decrease in retail gallons sold
due to warmer temperatures during the winter heating season. The El Nino weather
phenomenon impacted weather conditions during fiscal 1998. Temperatures during
fiscal 1998 were 4% warmer than normal and 4% warmer than fiscal 1997. In fiscal
1998, our revenues were 13.5% lower than in fiscal 1997 principally due to lower
propane prices (because of lower propane costs) and, to a lesser extent, due to
the warmer than normal temperatures. 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 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.
SUDDEN PROPANE PRICE INCREASES MAY ADVERSELY AFFECT OUR OPERATING RESULTS
The retail propane business is a "margin-based" business in which
gross profits depend on the excess of sales prices we receive over our propane
supply costs. Propane is a commodity, and its unit price is subject to volatile
changes in response to changes in supply or other market conditions over which
we have no control. In general, product supply contracts permit suppliers to
charge posted prices at the time of delivery or the current prices established
at major storage points such as Mont Belvieu, Texas and Conway, Kansas. 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
gross profits. We engage in transactions to hedge product costs from time to
time in an attempt to reduce cost volatility, although to date these activities
have not been significant. We cannot assure you that future volatility in
propane supply costs will not have a material adverse effect on our gross
profits, income and cash flow or our available cash required to make
distributions to our unitholders.
6
<PAGE>
BECAUSE OF THE HIGHLY COMPETITIVE NATURE OF THE RETAIL PROPANE BUSINESS, WE MAY
NOT BE ABLE TO MAINTAIN 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 is a major competitor of propane, but propane
generally enjoys a competitive price advantage over
electricity.
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 locations, 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
maintain competitive retail prices.
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 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 upon
our ability to acquire other retail propane distributors and to successfully
integrate them into our existing operations and to make cost-saving changes. Our
ability to incur debt to finance acquisitions may be restricted by some of the
covenants contained in our debt agreements. In addition, our access to capital,
our ability to make distributions to our unitholders and our acquisition
activities also may be limited to the extent that our operating and financial
results are adversely affected by warm winter weather or other factors.
ENERGY EFFICIENCY AND TECHNOLOGY ADVANCES MAY AFFECT DEMAND FOR PROPANE
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 retail customers. Future technological advances in
heating, conservation and energy generation may affect our financial condition
and results of operations.
7
<PAGE>
OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION MAY BE ADVERSELY AFFECTED BY
GOVERNMENTAL REGULATION AND ASSOCIATED ENVIRONMENTAL AND REGULATORY COSTS
The propane business is subject to a wide range of federal and state
laws and regulations related to environmental, health and safety and other
regulated matters. We have implemented environmental and health and safety
programs and policies designed to avoid potential liability and costs under
applicable environmental laws. It is possible, however, that we will have
increased costs due to stricter pollution control requirements or liabilities
resulting from non-compliance 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 AND LITIGATION RISKS 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 and litigation arising in the ordinary
course of business. We are self-insured for general and product, workers'
compensation and automobile 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. However, 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.
RISKS INHERENT IN AN 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.
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Cash distributions are dependent primarily on cash flow, including
from 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 reserves for, among other things, the proper conduct
of our business. These reserves will also affect the amount of cash available
for distributions.
OUR DEBT AGREEMENTS MAY LIMIT OUR ABILITY TO MAKE DISTRIBUTIONS TO UNITHOLDERS
AND OUR FINANCIAL FLEXIBILITY
As of March 25, 2000, we had outstanding $425 million of senior
promissory notes and $107 million of borrowings under our bank credit facility.
As a result, we have indebtedness that is substantial in relation to our
partners' equity. The 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 at least 5.1 to 1.0 or we will 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.
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 outside our control.
IF WE ISSUE ADDITIONAL LIMITED PARTNER INTERESTS AS CONSIDERATION FOR
ACQUISITIONS, THE EXISTING INTERESTS OF UNITHOLDERS WILL BE DILUTED
Our partnership agreement generally allows us to issue additional
limited partner interests and other equity securities without the approval of
the unitholders. However, we may not issue equity securities ranking senior to
the common units or more than an aggregate of 9,375,000 additional common units
or equivalent units at any time prior to March 31, 2001 without the approval of
the holders of at least a majority of the outstanding common units. These
limitations do not apply to issuances in connection with an acquisition or a
capital improvement that is accretive or in connection with the repayment of
certain indebtedness.
Our general partner, Suburban Energy 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. 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.
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 (with the next election to be held in 2003).
9
<PAGE>
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; 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.
THE GENERAL PARTNER CAN PROTECT ITSELF AGAINST DILUTION
Whenever we issue equity securities to any person other than the
general partner and its affiliates, the general partner has the right to
purchase additional limited partnership interests on the same terms to maintain
its percentage interest in Suburban. No other unitholder has a similar right.
Therefore, only the general partner may protect itself against dilution caused
by the issuance of additional equity securities.
UNITHOLDERS MAY NOT HAVE LIMITED LIABILITY IN SOME CIRCUMSTANCES AND MAY BE
LIABLE FOR THE RETURN OF SOME DISTRIBUTIONS
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
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
10
<PAGE>
and non-recourse 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.
OUR GENERAL PARTNER HAS PLEDGED THE GENERAL PARTNER INTERESTS IN SUBURBAN AS
SECURITY FOR A BANK LOAN AND THE OPERATING PARTNERSHIP HAS AGREED TO PURCHASE
THE BANK LOAN IF AN EVENT OF DEFAULT OCCURS
As part of our recapitalization in May 1999, our general partner
purchased all the general partner interests and incentive distribution rights
held by our former general partner, Suburban Propane GP, Inc., for $6.0 million.
Our general partner obtained the necessary funds from a loan provided by Mellon
Bank, N.A. The loan has a term of five years and bears interest payable
quarterly at a rate equal to LIBOR plus 2%. The loan is secured by a pledge of
the general partner's interests in us and in our operating partnership. Under
the pledge agreement, Mellon may foreclose on and sell the general partner's
interests that serve as collateral if an event of default occurs and is
continuing under the loan. The purchaser in the foreclosure sale would become
our general partner, and the general partner of the operating partnership, with
all the related rights and duties. Our existence and that of our operating
partnership would continue in accordance with the terms of our partnership
agreement under these circumstances.
Our operating partnership has agreed to purchase the loan from Mellon
if an event of default occurs under the loan. It has also agreed to reserve
availability under its bank credit facility for this purpose, which reduces
borrowing ability for working capital needs or other purposes. If the loan is
purchased, we or the operating partnership may cause to be forfeited and
cancelled up to all of the 596,821 units held in a benefits protection trust
established pursuant to a compensation deferral plan for the benefit of officers
and senior management who are the owners of the general partner.
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 the general partner and Suburban, Weil, Gotshal &
Manges 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.
11
<PAGE>
We cannot guarantee that the law will not be changed so as to 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 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
or indirectly by some or all of the unitholders and the general partner.
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.
Further, a unitholder may incur a tax liability, in excess of the amount of cash
received, upon the sale of its common units.
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 unique 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.
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 cannot
guarantee that we will not be audited by the IRS or that tax adjustments will
not be made. The rights of a unitholder owning less than a 1% profits interest
12
<PAGE>
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.
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. Prior
distributions in excess of cumulative net taxable income allocated for 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 unit's original cost. A portion of the amount realized, whether or not
representing gain, may be ordinary income. 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-l 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
schedules 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 IS A POSSIBILITY OF LOSS OF TAX BENEFITS RELATING TO NONUNIFORMITY 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 conform to Treasury Regulations under Section
743(b) of the Internal Revenue Code effective for purchases of common units on
or after December 15, 1999. However, for purchases of common units prior to
December 15, 1999, these conventions do not conform with all aspects of certain
proposed and final Treasury Regulations. A successful challenge to those
conventions by the IRS could adversely affect the amount of tax benefits
available to a purchaser of common units and could have a negative impact on the
value of 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.
13
<PAGE>
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.
14
<PAGE>
USE OF PROCEEDS
We estimate that we will receive approximately $40,567,000 from the
sale of the 2,175,000 common units that we are offering, or approximately
$46,703,000 if the underwriter's over-allotment option is exercised in full, in
each case after deducting the underwriting discount and offering expenses. We
will use the net proceeds for our general partnership purposes, which may
include working capital, capital expenditures and debt reduction. In addition,
if appropriate opportunities arise, we may use a portion of the proceeds to
finance one or more acquisitions of other propane distributors or companies in
related businesses. Although we are continually investigating possible
acquisitions in furtherance of our business strategy, we have no existing
commitments, agreements or understandings with respect to any particular
acquisition. Pending application for these purposes, the net proceeds will be
used to reduce outstanding revolving credit borrowings under our bank credit
facility. Borrowings under that facility bear interest at a variable rate based,
at our option, upon either LIBOR plus a margin, the federal funds rate plus 1/2
of 1% or the prime lending rate announced from time to time by First Union
National Bank.
15
<PAGE>
PRICE RANGE OF COMMON UNITS AND CASH DISTRIBUTIONS
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 cash distributions paid per common unit.
<TABLE>
<CAPTION>
PRICE RANGE
----------- CASH
HIGH LOW DISTRIBUTION
---- --- ------------
<S> <C> <C> <C>
1997 FISCAL YEAR
First Quarter ended December 28, 1996 $21.88 $18.75 $0.50
Second Quarter ended March 29, 1997 $20.63 $17.75 $0.50
Third Quarter ended June 28, 1997 $18.75 $17.00 $0.50
Fourth Quarter ended September 27, 1997 $20.19 $18.06 $0.50
1998 FISCAL YEAR
First Quarter ended December 27, 1997 $20.56 $15.38 $0.50
Second Quarter ended March 28, 1998 $20.00 $17.50 $0.50
Third Quarter ended June 27, 1998 $19.50 $18.00 $0.50
Fourth Quarter ended September 26, 1998 $20.00 $17.56 $0.50
1999 FISCAL YEAR
First Quarter ended December 26, 1998 $19.94 $17.13 $0.50
Second Quarter ended March 27, 1999 $20.13 $18.00 $0.50
Third Quarter ended June 26, 1999 $20.50 $17.94 $0.5125
Fourth Quarter ended September 25, 1999 $20.75 $19.00 $0.5125
2000 FISCAL YEAR
First Quarter ended December 25, 1999 $20.63 $16.50 $0.525
Second Quarter ended March 25, 2000 $20.00 $16.44 $0.525
Third Quarter ended June 24, 2000 $20.15 $18.38 $0.525
</TABLE>
16
<PAGE>
CAPITALIZATION
The following presents our capitalization of as of March 25, 2000,
and as adjusted to give effect to our sale of the 2,175,000 common units offered
by this prospectus and our receipt of the estimated net proceeds from that sale.
<TABLE>
<CAPTION>
March 25, 2000
-------------------------------------------------------
(unaudited)
Historical As Adjusted
---------- -----------
(In thousands)
<S> <C> <C>
Liabilities:
Short-term debt........................................ $ 10,000 $ 10,000
Long-term debt......................................... 524,563 524,563
Partners' Capital:
Common unitholders..................................... 110,055 150,622
General partner........................................ 2,919 2,919
Common units held in trust, at cost.................... 11,567 11,567
Deferred compensation trust............................ (11,567) (11,567)
Unearned compensation.................................. (757) (757)
------------- -------------
Total partners' capital................................ 112,217 152,784
------------- -------------
Total capitalization.............................. $ 646,780 $ 687,347
============= =============
</TABLE>
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SELECTED FINANCIAL DATA
The following table presents selected condensed consolidated
historical financial data of Suburban and its predecessor company, Quantum
Chemical Corporation. Suburban and its operating partnership were formed in 1995
to acquire and operate the propane business and assets of Suburban Propane, a
division of Quantum, then owned by Hanson PLC. Suburban Propane had been
continuously engaged in the retail propane business since 1928 and had been
owned by Quantum since 1983. The selected condensed consolidated historical
financial data of the predecessor company and the annual selected condensed
consolidated historical financial data of Suburban have been derived from the
audited financial statements of Quantum and Suburban, respectively. All amounts
in the table below, except per unit data, are in thousands.
<TABLE>
<CAPTION>
Predecessor Company Suburban (a)
---------------------------------- ----------------------------------------------------------
October 1, March 5,
Year 1995 1996
Ended through through Year Ended Six Months Ended
Sept. 30, March 4, Sept. 28, Sept. 27, Sept. 26, Sept. 25 March 27, March 25,
1995 1996 1996 1997 1998 1999 1999 2000
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues......................... $ 633,620 $ 383,999 $ 323,947 $ 771,131 $ 667,287 $ 619,778 $ 383,194 $ 491,342
Depreciation and amortization.... 34,055 14,816 21,046 37,307 36,531 34,906 17,512 18,890
Restructuring charge............. - - 2,340 6,911 - - - -
Recapitalization cost............ - - - - - 18,903 - -
Gain on sale of assets........... - - - - - - - 10,328
Income (loss) before interest
expense and income taxes...... 55,544 61,796 (3,464) 47,763 68,814 53,272 78,740 87,030
Interest expense, net............ - - 17,171 33,979 30,614 30,765 15,183 19,642
Provision for income taxes....... 25,299 28,147 147 190 35 68 26 92
Net income (loss)................ 30,245 33,649 (20,782) 13,594 38,165 22,439 63,531 67,296
Net income (loss) per Unit (b)... - - $ (0.71) $ 0.46 $ 1.30 $ 0.83 $ 2.17 $ 2.96
BALANCE SHEET DATA (END OF PERIOD)
Current assets................... 78,846 $ 120,692 $ 104,361 $ 132,781 $ 78,637 $ 171,492 $ 149,900
Total assets..................... 705,686 776,651 745,634 729,565 659,220 760,602 805,615
Current liabilities.............. 69,872 101,826 96,701 91,550 103,006 81,214 109,913
Long-term debt................... - 428,229 427,970 427,897 427,634 428,268 524,563
Other long-term liabilities...... 77,579 81,917 79,724 62,318 60,194 61,463 58,922
Predecessor Equity............... 558,235 - - - - - - -
Partners' capital - General Partner - - 3,286 12,830 24,488 2,044 25,318 2,919
Partners' capital - Limited
Partners....................... - - 161,393 128,409 123,312 66,342 164,339 109,298
STATEMENT OF CASH FLOW DATA
Cash provided by (used in)
Operating activities............. $ 53,717 $ (3,765) $ 62,961 $ 58,848 $ 70,073 $ 81,758 $ 45,313 $ 15,223
Investing activities............. $ (22,317) $ (21,965) $ (30,449) $ (20,709) $ 2,900 $ (12,241) $ (8,240) $ (88,372)
Financing activities............. $ (31,562) $ 25,799 $ (13,786) $ (37,734) $ (32,490) $(120,944) $ (22,050) $ 77,543
OTHER DATA
EBITDA (c)....................... $ 89,599 $ 76,612 $ 17,582 $ 85,070 $ 105,345 $ 88,178 $ 96,252 $ 105,920
Capital expenditures (d)
Maintenance and growth........... $ 21,359 $ 9,796 $ 16,089 $ 24,888 $ 12,617 $ 11,033 $ 5,856 $ 9,372
Acquisitions..................... $ 5,817 $ 13,172 $ 15,357 $ 1,880 $ 4,041 $ 4,768 $ 4,336 $ 97,684
Retail propane gallons sold...... 527,269 309,871 257,029 540,799 529,796 524,276 332,648 332,381
</TABLE>
----------------
Footnotes on following page.
18
<PAGE>
Notes:
-----
(a) Suburban acquired the propane business and assets of Quantum on March
5, 1996. There are no material differences in the basis of assets and
liabilities between Suburban and Quantum.
(b) Net income (loss) per unit is computed by dividing the limited
partners' interest in net income (loss) by the number of weighted
average units outstanding.
(c) EBITDA (earnings before interest, taxes, depreciation and
amortization) represents income (loss) before interest expense and
income taxes plus depreciation and amortization. EBITDA, which is not
an alternative to net income, is included solely because it provides
additional information for evaluating our ability to pay our minimum
required quarterly distribution.
(d) Our capital expenditures fall generally into three categories:
o maintenance expenditures, which include expenditures for
repair and replacement of property, plant and equipment;
o growth capital expenditures, which include new propane tanks
and other equipment to facilitate expansion of Suburban's
customer base and operating capacity; and
o acquisition capital expenditures, which include expenditures
related to the acquisition of retail propane operations and a
portion of the purchase price allocated to intangibles
associated with these acquired businesses.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is a discussion of our historical financial condition
and results of operations. The discussion should be read in conjunction with the
historical consolidated financial statements, including the notes to those
financial statements included elsewhere in this prospectus.
GENERAL
Our retail propane business consists primarily of transporting
propane purchased on a year-to-year contract basis and in the spot market,
mainly from major oil companies, to our retail distribution outlets and then to
storage tanks located on our customers' premises. In our wholesale operations,
we sell propane to large industrial end-users and other propane distributors.
PRODUCT COSTS
The retail propane business is a "margin-based" business where the
level of profitability is largely dependent on the difference between retail
sales prices and product cost. The unit cost of propane is subject to volatile
changes as a result of product supply or other market conditions. Propane unit
cost changes can occur rapidly over a short period of time and can impact retail
margins. We cannot assure you that we will be able to fully pass on to customers
our product cost increases, particularly when those increases occur rapidly.
SEASONALITY
The retail propane distribution business is seasonal because propane
is primarily used for heating in residential and commercial buildings.
Historically, we sell approximately two-thirds of our retail propane volume
during the six-month peak heating season of October through March. Consequently,
sales and operating profits are concentrated in our first and second fiscal
quarters. Cash flows from operations, therefore, are greatest during the second
and third fiscal quarters when customers pay for propane purchased during the
winter heating season. To the extent necessary, we reserve cash from the second
and third quarters for distribution to unitholders in the first and fourth
fiscal quarters.
WEATHER
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. Accordingly, the volume of propane sold is
directly affected by the severity of the winter weather which can vary
substantially from year to year.
RISK MANAGEMENT
We engage in hedging transactions to reduce the effect of 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
contracts on the New York Mercantile Exchange and we enter into forward and
option agreements to purchase and sell propane at fixed prices in the future.
Our management monitors these activities closely through enforcement of our
commodity trading policy. Hedging does not always result in increased product
margins and we do not consider hedging activities to be material to our
operations or liquidity.
20
<PAGE>
SELECTED QUARTERLY FINANCIAL DATA
Due to the seasonality of the retail propane business, first and
second quarter revenues, gross profit and earnings are consistently greater than
the comparable third and fourth quarter results. The following tables present
our selected quarterly financial data for the last two fiscal years:
Fiscal 1999 (unaudited) (in thousands, except per Unit amounts)
<TABLE>
<CAPTION>
First Quarter Second Quarter Third Quarter Fourth Quarter Fiscal 1999
------------- -------------- ------------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Revenues $161,216 $221,978 $121,905 $114,679 $619,778
Recapitalization Costs - - (18,903) - (18,903)
Income (Loss) Before Interest
Expense and Income Taxes 23,963 54,777 (17,948) (7,520) 53,272
Net Income (Loss) 16,370 47,161 (25,293) (15,799) 22,439
Net Income (Loss) per Unit 0.56 1.61 (.93) (.70) 0.83
EBITDA(a) 32,745 63,507 (9,259) 1,185 88,178
Retail Gallons Sold 137,603 195,045 103,893 87,735 524,276
Fiscal 1998 (unaudited) (in thousands, except per Unit amounts)
First Quarter Second Quarter Third Quarter Fourth Quarter Fiscal 1998
------------- -------------- ------------- -------------- -----------
Revenues $204,886 $230,429 $125,109 $106,863 $667,287
Income (Loss) Before Interest
Expense and Income Taxes 35,025 44,757 (2,925) (8,043) 68,814
Net Income (Loss) 26,901 37,011 (10,235) (15,512) 38,165
Net Income (Loss) per Unit .92 1.26 (.35) (.53) 1.30
EBITDA(a) 44,317 53,930 6,154 944 105,345
Retail Gallons Sold 158,278 180,139 100,735 90,644 529,796
</TABLE>
----------------
(a) EBITDA (earnings before interest, taxes, depreciation and
amortization) represents income (loss) before interest expense and
income taxes plus depreciation and amortization. EBITDA should not be
considered as an alternative to net income as an indicator of
operating performance or as an alternative to cash flow as a measure
of liquidity or ability to service debt obligations and is not in
accordance with or superior to generally accepted accounting
principles. Rather, it provides additional information for evaluating
our ability to pay the minimum quarterly distribution to unitholders
of $0.50 per unit. Because EBITDA excludes some, but not all, items
that affect net income and this measure may vary among companies, the
EBITDA data presented above may not be comparable to similarly titled
measures of other companies.
RESULTS OF OPERATIONS
SIX MONTHS ENDED MARCH 25, 2000
COMPARED TO SIX MONTHS ENDED MARCH 27, 1999
Revenues. Our revenues increased 28.2% or $108.1 million to $491.3
million for the six months ended March 25, 2000 compared to $383.2 million for
the six months ended March 27, 1999. The overall increase is primarily
attributable to higher propane costs resulting in higher sales prices to
customers and an increase in the sales of appliances and related products. We
21
<PAGE>
sold 332.4 million gallons of propane to retail customers, which is comparable
to the amount we sold in the corresponding period in fiscal 1999. Gallons sold
remained consistent despite record warmer temperatures, which, nationwide, were
13% warmer than normal during the 2000 period as compared to 9% warmer than
normal during the 1999 period. The effect of warmer temperatures was offset by
retail volumes associated with the SCANA acquisition and favorable customer
gains. Wholesale gallons sold and gallons sold related to price risk management
activities increased 22.3% or 25.5 million gallons to 139.5 million gallons,
principally resulting from increased market opportunities attributable to a more
volatile propane pricing environment.
Operating Expenses. Operating expenses increased 7.0% or $7.5 million
to $114.7 million for the six months ended March 25, 2000 compared to $107.2
million for the six months ended March 27, 1999. The increase in operating
expenses is principally attributable to increased payroll and benefit costs
resulting from the SCANA acquisition, expansion of retail and service business
initiatives and, to a lesser extent, higher vehicle fuel costs.
General and Administrative Expenses. General and administrative
expenses decreased 6.8% or $1.0 million to $13.6 million for the six months
ended March 25, 2000 compared to $14.6 million for the six months ended March
27, 1999. The decrease is primarily attributable to lower professional services,
principally in the information systems area.
Income Before Interest Expense and Income Taxes and EBITDA. Results
for the six month period include a $10.3 million gain from the sale of assets.
Excluding this one-time item, income before interest expense and income taxes
decreased $2.0 million to $76.7 million in the six months ended March 25, 2000
compared to $78.7 million in the prior year's comparable period. EBITDA,
excluding the one-time item, decreased $0.7 million or 0.7% to $95.6 million.
The decreases in income before interest expense and income taxes and in EBITDA
are primarily attributable to higher operating expenses associated with the
acquisition of SCANA and retail and service business initiatives, partially
offset by an increase in gross profit reflecting higher appliance and related
product sales.
Interest Expense. Net interest expense increased $4.4 million to
$19.6 million in the six months ended March 25, 2000 compared with $15.2 million
in the prior period. The increase is primarily attributable to interest expense
on borrowings to fund the acquisition of SCANA.
FISCAL YEAR 1999 COMPARED TO FISCAL YEAR 1998
Revenues. Our revenues decreased $47.5 million or 7.1% to $619.8
million in fiscal 1999 compared to $667.3 million in fiscal 1998. Revenues from
retail propane activities decreased $31.8 million or 6.1% to $491.6 million in
fiscal 1999 compared to $524.3 million in fiscal 1998. This decrease is
primarily attributable to lower product costs, which resulted in lower selling
prices and, to a lesser extent, a decrease in retail gallons sold.
Overall, higher nationwide inventories of propane, coupled with
warmer than normal temperatures during the winter of fiscal 1999, resulted in a
significant decrease in the cost of propane when compared to the winter of
fiscal 1998. Temperatures during fiscal 1999 were 8% warmer than normal and 1%
warmer than fiscal 1998, as reported by National Oceanic and Atmospheric
Administration ("NOAA"). Temperatures during October through March of the fiscal
1999 heating season were among the warmest on record, with temperatures
nationwide being 9% warmer than normal and 2% warmer than in the prior year.
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Retail gallons sold decreased 1.0% or 5.5 million gallons to 524.3
million gallons in fiscal 1999 compared to 529.8 million gallons in the prior
year. The decline in retail gallons sold is principally attributable to warmer
temperatures, mostly during the winter heating season, in all areas of our
operations.
Revenues from wholesale and risk management activities decreased
$22.5 million or 29.9% to $52.7 million in fiscal 1999 compared to $75.2 million
in fiscal 1998. This decrease is attributed to lower product costs which
resulted in lower selling prices and to our reduced emphasis on wholesale
marketing, due to the low margin nature of the wholesale market.
Other revenues increased 9.9% or $6.8 million to $75.5 million in
fiscal 1999 compared to $68.7 million in fiscal 1998. The increase is
attributable to higher sales of appliances and related parts and an increase in
service/installation revenues associated with several retail growth initiatives.
Operating Expenses. Operating expenses remained consistent with
fiscal 1999 amounting to $210.2 million compared to $210.4 million in fiscal
1998 as lower payroll, benefits costs and vehicle fuel costs were offset by
increased operating expenses associated with several retail growth initiatives.
General and Administrative Expenses. General and administrative
expenses decreased $0.8 million or 2.7% to $29.4 million in fiscal 1999 compared
to $30.2 million in the prior year. Fiscal 1998 results reflect a $1.4 million
write-off of certain impaired information system assets and a $2.0 million
charge related to insurance claims for which insurance coverage was denied.
Excluding these non-recurring items, general and administrative expenses
increased $2.6 million or 9.7% in fiscal 1999, mainly due to higher information
system expenses including costs incurred to address Y2K compliance and the
absence of offsetting dividend income of $0.8 million earned in the prior year
on the sold investment in the Dixie Pipeline Company.
Recapitalization Costs. Results for fiscal 1999 reflect expenses of
$18.9 million incurred in connection with our recapitalization transactions.
Approximately $7.6 million of the recapitalization costs represent amounts paid
for financial advisory fees, proxy solicitation fees, legal, accounting and tax
service fees and $1.0 million paid to Millennium Chemicals, Inc., the ultimate
parent of our former general partner, Suburban Propane GP, Inc., to extend the
scheduled closing date for the recapitalization. The $7.6 million includes
approximately $0.3 million of expenses paid for the purchase of our former
general partner's interests. Approximately $11.3 million of the recapitalization
costs reflect compensation expense recognized upon accelerated vesting of
673,165 issued and outstanding restricted units on the closing date of the
recapitalization pursuant to the change of control provisions of the restricted
unit plan. We also incurred approximately $1.8 million in fees and expenses to
amend its senior note agreement. This amount has been deferred and is being
amortized over the remaining term of our outstanding senior notes, which is
approximately 11.5 years.
Income Before Interest Expense and Income Taxes and EBITDA. Results
for the fiscal year 1999 include $18.9 million of recapitalization costs.
Results for fiscal 1998 include a $5.1 million gain from the sale of an
investment in the Dixie Pipeline Company, a $1.8 million write-off of impaired
assets and a $2.0 million charge related to insurance claims for which insurance
coverage was denied. Excluding these one-time items from both periods, income
before interest expense and income taxes increased 6.9% or $4.7 million to $72.2
million compared to $67.5 million in the prior period. EBITDA, excluding the
one-time items from both periods, increased 2.9% or $3.0 million to $107.1
million compared to $104.1 million in the prior period.
The improvement in income before interest expense and income taxes
and EBITDA is primarily attributable to higher overall gross profit of $5.8
million, partially offset by higher general and administrative expenses. The
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increase in gross profit principally resulted from higher sales of appliances
and related parts and increased service/installation activities attributable to
several retail growth initiatives and an increase in gains realized on our
product procurement and price risk management activities, including hedging
transactions.
Interest Expense. Net interest expense remained comparable at $30.8
million in fiscal 1999 compared with $30.6 million in the prior year.
FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997
Revenues. Our revenues decreased $103.8 million or 13.5% to $667.3
million in fiscal 1998 compared to $771.1 million in fiscal 1997. Revenues from
retail activities decreased $77.1 million or 12.8% to $523.4 million in fiscal
1998 compared to $600.5 million in fiscal 1997. This decrease is primarily
attributable to lower product costs which resulted in lower selling prices and,
to a lesser extent, a decrease in retail gallons sold.
Overall, higher nationwide inventories of propane, coupled with
warmer than normal temperatures during the winter of fiscal 1998, resulted in a
significant decrease in the cost of propane when compared to the winter of
fiscal 1997. Temperatures during fiscal 1998 were 4% warmer than normal and 4%
warmer than fiscal 1997, as reported by the NOAA, which is attributable to the
El Nino weather phenomenon. Temperatures during January and February of the
fiscal 1998 heating season were the warmest on record according to the NOAA,
which began keeping records over 100 years ago.
Retail gallons sold decreased 2.0% or 11.0 million gallons to 529.8
million gallons in fiscal 1998 compared to 540.8 million gallons in the prior
year. The decline in retail gallons sold is attributable to warmer temperatures
during the winter heating season.
Revenues from wholesale and risk management activities decreased
$25.0 million or 25.0% to $75.2 million in fiscal 1998 compared to $100.2
million in fiscal 1997. This decrease is attributable to our reduced emphasis on
wholesale marketing, due to the low margin nature of the wholesale market. The
decrease in wholesale revenues was partially offset by the increase in our
product procurement and price risk management activities which began in the
fourth quarter of fiscal 1997. Revenues from risk management activities
increased $5.6 million to $13.8 million in 1998 compared to $8.2 million in
fiscal 1997. The gallons sold for risk management purposes in fiscal 1998 and
1997 were 40.8 million and 17.0 million, respectively.
Operating Expenses. Operating expenses decreased $7.6 million or 3.4%
to $210.4 million in fiscal year 1998 compared to $218.0 million in the prior
year. The decrease is primarily attributable to the continued favorable impact
of restructuring activities undertaken during 1997, principally lower payroll
and benefit costs.
General and Administrative Expenses. General and administrative
expenses increased $5.9 million or 24.3% to $30.2 million in fiscal 1998
compared to $24.3 million in the prior year. The increase is primarily
attributable to a $1.4 million write-off of certain impaired information systems
assets, an increase in professional consulting services, mostly in the
information systems area, and a $2.0 million charge related to insurance claims
for which insurance coverage was denied. The $1.4 million write-off of impaired
assets principally represents software and implementation costs incurred under a
project to replace our retail/sales system. The project was aborted when our
management determined that the software did not have the functionality and
flexibility originally represented by the software vendor. As such, we never
installed the new software and are continuing to use the existing retail/sales
system. The insurance claim resulted from the collapse of our underground
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propane storage cavern and associated fire that occurred in Hainesville, Texas
in November 1995. Third parties who owned interests in nearby oil and gas wells
sued us, Millennium and other parties and claimed damage to the wells resulting
from the collapse of the underground cavern and alleged brine water migration.
Our insurance carrier denied coverage based upon the pollution exclusion
endorsement of its policy. We settled this claim in December 1998 for $1.55
million, $0.3 million of which was paid by Millennium.
Income Before Interest Expense and Income Taxes and EBITDA. Results
for the fiscal year 1998 include a $5.1 million gain from the sale of an
investment in the Dixie Pipeline Company and a $1.8 million write-off of certain
impaired assets. Results for the prior year period include a restructuring
charge of $6.9 million. Excluding these one-time items from both periods, income
before interest expense and income taxes increased 19.7% or $10.8 million to
$65.5 million compared to $54.7 million in the prior period. EBITDA, excluding
the one-time items from both periods, increased 10.9% or $10.0 million to $102.0
million compared to $92.0 million in the prior period.
The improvement in income before interest expense and income taxes
and EBITDA is primarily attributable to higher overall gross profit and lower
operating expenses partially offset by higher general and administrative
expenses. The increase in gross profit principally resulted from overall higher
average propane unit margins and the expansion of our product procurement and
price risk management activities, including hedging transactions, partially
offset by reduced volume of retail propane gallons sold. The overall higher
average propane unit margins were attributable to lower product costs, resulting
from a less volatile propane market during 1998 and more favorable purchasing
contracts which were not fully reflected in lower retail selling prices.
Interest Expense. Net interest expense decreased $3.4 million to
$30.6 million in fiscal 1998 compared with $34.0 million in the prior year. The
decrease is attributable to higher interest income on significantly increased
cash investments in fiscal 1998 resulting from higher net income, proceeds from
the sale of our investment in the Dixie Pipeline Company and, to a lesser
extent, improved working capital management and lower product costs.
LIQUIDITY AND CAPITAL RESOURCES
Due to the seasonal nature of the propane business, cash flows from
operating activities are greater during the winter and spring seasons as
customers pay for propane purchased during the heating season.
For the six months ended March 25, 2000, net cash provided by
operating activities was $15.2 million compared to $45.3 million in the six
months ended March 27, 1999. The decrease of $30.1 million was primarily due to
higher working capital requirements resulting from the increased cost of
propane.
Net cash used in investing activities was $88.4 million during the
six months ended March 25, 2000, and consisted of acquisition payments of $97.7
million in connection with the SCANA acquisition and capital expenditures of
$9.4 million (including $3.6 million for maintenance expenditures and $5.8
million to support the growth of operations), offset by proceeds of $18.7
million from sales of property, plant and equipment, including 23 customer
service centers. Net cash used in investing activities was $8.2 million for the
six months ended March 27, 1999, and consisted of capital expenditures of $5.9
million (including $1.6 million for maintenance expenditures and $4.3 million to
support the growth of operations) and acquisition payments of $4.3 million,
offset by $2.0 million from sales of property, plant and equipment.
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Net cash provided by financing activities for the six months ended
March 25, 2000 was $77.5 million, principally reflecting borrowings to fund the
SCANA acquisition and working capital borrowings, partially offset by
distributions to unitholders. Net cash used in financing activities for the six
months ended March 27, 1999 was $22.1 million, principally reflecting
distributions to unitholders.
In fiscal 1999, net cash provided by operating activities increased
$11.7 million to $81.8 million compared to $70.1 million in fiscal 1998. The
increase is primarily due to higher net income of $8.3 million after excluding
the non-recurring recapitalization costs of $18.9 million in fiscal 1999 and the
$5.1 million gain on the sale of an investment in fiscal 1998, and favorable
changes in operating assets and liabilities of $4.2 million, partially offset by
lower depreciation and amortization of $1.6 million. Changes in operating assets
and liabilities include an increase in accounts payable of $15.2 million
primarily attributable to changes in the timing and payment terms on propane
purchases partially offset by decreases in accounts receivable of $5.3 million,
inventories of $1.7 million and prepaid expenses and other current assets of
$2.3 million.
Net cash used in investing activities was $12.2 million in fiscal
1999, reflecting $11.0 million in capital expenditures, including $3.2 million
for maintenance expenditures and $7.8 million to support the growth of
operations and $4.8 million of payments for acquisitions, offset by net proceeds
of $3.6 million from the sale of property, plant and equipment. Net cash
provided by investing activities was $2.9 million in fiscal 1998, consisting of
capital expenditures of $12.6 million, including $6.0 million for maintenance
expenditures and $6.6 million to support the growth of operations and
acquisition payments of $4.0 million, offset by proceeds from the sale of
property and equipment of $6.5 million and $13.1 million from the sale of the
investment in the Dixie Pipeline Co.
Net cash used in financing activities in fiscal 1999 was $120.9
million, reflecting $69.0 million paid to our former general partner to redeem
all outstanding subordinated units and additional partnership units as part of
our recapitalization, $9.4 million of recapitalization costs, $2.1 million of
net working capital borrowings under our bank credit facilities and $44.6
million in distributions to unitholders.
In fiscal 1998, net cash provided by operating activities increased
$11.3 million to $70.1 million compared to $58.8 million in fiscal 1997. The
increase is primarily due to an increase in net income, exclusive of non-cash
items, of $11.2 million. Changes in operating assets and liabilities reflect
decreases in accounts receivable of $2.3 million, inventories of $6.3 million
and accounts payable of $3.5 million principally due to the lower cost of
propane. These decreases were partially offset by an increase in accrued
employment and benefit costs of $6.6 million reflecting higher
performance-related payroll accruals and an increase in deferred credits and
other non-current liabilities of $3.0 million.
Net cash used in financing activities in fiscal 1998 was $32.5
million, reflecting $44.2 million of distributions to unitholders and $0.3
million in debt repayments partially offset by $12.0 million in additional
partnership unit contributions received from our former general partner.
In fiscal 1997, net cash provided by operating activities decreased
$0.3 million or 0.6% to $58.8 million compared to $59.2 million for fiscal year
1996. Cash provided by operating activities during fiscal 1997 reflects
increases in cash from accounts receivable of $23.1 million, prepaid and other
current assets of $4.9 million and inventories of $11.8 million principally due
to lower sales volumes and a resulting decline in propane purchases. These
increases were offset by an aggregate decrease in accounts payable, accrued
interest and accrued employment and benefit costs of $37.9 million and $4.3
million of cash expenditures incurred in connection with our restructuring in
1997.
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Net cash used in financing activities for fiscal 1997 was $37.7
million, reflecting $47.4 million of distributions by us to unitholders and $0.3
million in debt repayments partially offset by $10.0 million in additional
partnership unit contributions from our former general partner.
In March 1996, our operating partnership issued $425.0 million
aggregate principal amount of its senior notes with an interest rate of 7.54%.
The senior notes mature June 30, 2011. Principal is repayable in equal annual
payments of $42.5 million starting June 30, 2002.
We have a $175.0 million unsecured bank credit facility, consisting
of a $100.0 million acquisition facility and a $75.0 million working capital
facility. Borrowings are incurred on a revolving credit basis and bear interest
at a rate based upon either LIBOR plus a margin, First Union National Bank's
prime rate or the Federal Funds rate plus 1/2 of 1%. An annual fee ranging from
.25% to .50% based upon certain financial tests is payable quarterly whether or
not borrowings occur. The combined facility expires on March 31, 2001. At our
option, we may extend the expiration date to December 31, 2001, provided that
the maximum ratio of consolidated total indebtedness to EBITDA (as defined in
the credit facility) will decrease from 5.10 to 1.00 to 4.75 to 1.00 during the
nine month extension period. Our outstanding borrowings totalled $107.0 million
as of March 25, 2000, consisting of $97.0 million under the acquisition facility
and $10.0 million under the working capital facility.
The senior note agreement and the bank credit facility contain
various restrictive and affirmative covenants, including
o maintenance of certain financial tests,
o restrictions on the incurrence of additional indebtedness, and
o restrictions on certain liens, investments, guarantees, loans,
advances, payments, mergers, consolidations, distributions,
sales of assets and other transactions.
The operating partnership was in compliance with all covenants and terms as of
March 25, 2000.
On December 3, 1999, we sold 23 customer service centers located
principally in Georgia for approximately $19.4 million. We utilized the proceeds
of this sale to reduce outstanding borrowings under the bank credit facility.
We make distributions in an amount equal to all of our available
cash, less appropriate reserves, approximately 45 days after the end of each
fiscal quarter to our unitholders of record on the applicable record dates. We
have made total distributions of $.5250 per common unit to our common
unitholders for each of the first three quarters of fiscal 2000, consisting of
the minimum required distribution of $.50 and an additional distribution of
$0.025.
Our ability to satisfy our future obligations will depend on our
future operating performance, which will be subject to prevailing economic,
financial, business and weather conditions and other factors, many of which are
beyond our control. Based on our current cash position, available bank credit
facilities and expected cash flow from operating activities, we expect to have
sufficient funds to meet our obligations and working capital needs, and pay
distributions at least at the current level for the next twelve months.
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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 and services. We believe
we are the third largest retail marketer of propane in the United States. As of
June 24, 2000, we were serving more than 750,000 active residential, commercial,
industrial and agricultural customers from approximately 350 customer service
centers in over 40 states located primarily in the east and west coast regions
of the country. We sold approximately 524.3 million gallons of propane to retail
customers during our last fiscal year, which ended September 25, 1999. During
the same year, we sold an additional 182.3 million gallons 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.
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 chiefly for space
heating, water heating, clothes drying and cooking. Industrial customers use
propane primarily 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 most often used 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, producing negligible amounts of pollutants
when consumed.
PRODUCTS, SERVICES AND MARKETING
We distribute propane through a nationwide retail network of
approximately 350 customer service centers in over 40 states. Approximately
two-thirds of our retail propane volume is sold during the six-month peak
heating season from October through March, as many customers use propane for
heating purposes. Typically, our customer service centers are located in
suburban and rural areas where natural gas is not readily available. Generally,
each service center consists 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, which eliminates the customer's need
to make an affirmative purchase decision. From our customer service centers, as
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well as stand-alone retail centers, we also sell, install and service
propane-related equipment, including heating and cooking appliances, hearth
products and supplies and, at locations, propane fuel systems for motor
vehicles.
We sell propane primarily to six markets: residential, commercial,
industrial (including engine fuel), agricultural, other retail users and
wholesale customers. Of the 524.3 million gallons of propane we sold at retail
during fiscal 1999, customers in the following categories accounted for the
percentages indicated:
o residential customers.........................................38.0%;
o commercial customers..........................................24.7%;
o industrial customers (including to engine fuel customers).....14.8%;
o agricultural customers.........................................6.7%; and
o other retail users............................................15.8%.
Sales to residential customers in fiscal 1999 accounted for approximately 52.2%
of our gross profit on propane sales. This figure reflects the higher-margin
nature of this segment of the market. No single customer accounted for 10% or
more of our revenues during fiscal year 1999.
Retail deliveries of propane are usually made to customers by means
of special trucks, known as bobtail and rack trucks. Propane is pumped from the
bobtail truck, which generally holds 2,200 gallons of propane, into a stationary
storage tank on the customer's premises. The capacity of these 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 we deliver filled cylinders to customers, we pick up empty
cylinders for replenishment at our local service center or we refill them in
place. We also deliver propane to other bulk-end users 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 to our service centers from refineries, coastal terminals, pipeline
terminals and storage facilities by a combination of common carriers,
owner-operators and railroad tank cars. We also use a number of interstate
pipelines to transport propane from suppliers to our storage facilities.
In addition to our retail operations, we also sell propane at
wholesale to large industrial end-users and other propane distributors. During
fiscal 1999, we sold 182.3 million gallons for risk management purposes and to
wholesale customers. This market segment 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 reduced our emphasis on wholesale marketing, and our sales of propane at
wholesale gallons have been decreasing.
PROPANE PURCHASING
We purchase propane from over 100 oil companies and natural gas
processors at more than 150 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 in the spot market. Supply
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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.
Historically, supplies of propane from our customary sources have
been readily available. During fiscal 1999, Shell Oil Company and Exxon
Corporation accounted for approximately 12% and 11%, respectively, of our total
domestic propane purchases. We believe that, if supplies from either Shell or
Exxon were interrupted, we would be able to secure adequate propane supplies
from other sources without a material disruption of our operations. Other than
Shell or Exxon, no single supplier accounted for more than 10% of our total
domestic propane purchases in fiscal 1999. During that year, approximately 94%
of our total propane purchases were from domestic suppliers.
We seek to reduce the effect of propane price volatility to help
insure the availability of propane during periods of short supply through
propane futures transactions on the New York Mercantile Exchange as well as the
purchase and sale of forward and option contracts with various third parties.
These activities are carefully monitored by our senior management.
We operate large propane storage facilities in Mississippi,
California and South Carolina. We also operate smaller storage facilities in
other locations, and have rights to use storage facilities in additional
locations. 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 ensures that we have a more secure
supply of propane during periods of intense demand or price instability.
COMPETITION
According to the Energy Information Agency, propane accounts for
approximately three to four percent of household energy consumption in the
United States. As an energy source, propane competes with electricity, natural
gas and fuel oil, primarily on the basis of price, availability and portability.
Propane is more expensive than natural gas on an equivalent BTU 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, 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 business 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
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publications, we believe that the ten largest retailers, including us, account
for approximately 33% 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 available industry statistics, we believe
that we account for approximately 5% of the domestic retail market for propane.
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 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. These laws include the Resource Conservation and Recovery
Act, the Comprehensive Environmental Response, Compensation and Liability Act,
or 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 where other hazardous substances may
exist.
Pursuant to the 1990 amendments to the Clean Air Act, the United
States Environmental Protection Agency required that risk management plans be
implemented at all locations storing over 10,000 pounds of propane. After
obtaining a stay of the deadline, the propane industry presented its position to
numerous legislators in Congress. On August 5, 1999, President Clinton signed
into law an amendment to the Clean Air Act, removing flammable substances,
including propane, from the list of substances regulated under the EPA's risk
management program when that substance is used as or held for sale as a fuel at
a retail facility. Based upon the amendment's definition of "retail facility" we
would only be required to comply with the risk management plan requirement for
those locations in which more than one-half of the income is neither obtained
from direct sales to end users nor at which more than one-half of the fuel sold,
by volume, is sold through a cylinder exchange program. We anticipate that all
of our facilities that would be subject to the requirements of the plan will be
in compliance with those requirements at or before the date the stay is lifted.
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 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. We also are
subject to regulations promulgated under the Federal Motor Carrier Safety Act
with respect to the transportation 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
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, including recently enacted regulations regarding the unloading of
liquefied compressed gas cargo tank motor vehicles.
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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 operations or financial condition.
EMPLOYEES
As of June 24, 2000, we had approximately 3,180 full time employees,
of whom approximately 285 were general and administrative (including fleet
maintenance personnel), 25 were engaged in transportation and product supply and
the balance were customer service center employees. Approximately 140 of our
employees are represented by 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 June 24, 2000, we owned approximately 68% of our customer
service center and satellite locations and leased the balance of our retail
locations from third parties. In addition, we own and operate a 187 million
gallon underground storage facility in Hattiesburg, Mississippi, a 22 million
gallon refrigerated, above-ground storage facility in Elk Grove, California and
a 60 million gallon underground storage cavern in Tirzah, South Carolina.
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 June 24, 2000, we
had a fleet of 16 transport truck tractors, of which we owned 13, and 328
railroad tank cars, of which we own approximately 1%. In addition, we used 1,286
bobtail and rack trucks, of which we owned approximately 60%, and 1,424 other
delivery and service vehicles, of which we owned approximately 48%. Vehicles
that are not owned by us are leased. As of June 24, 2000, we also owned
approximately 925,000 customer storage tanks with typical capacities of 100 to
500 gallons and approximately 103,000 portable cylinders with typical capacities
of 5 to 10 gallons.
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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 member of the Board of Supervisors serves for a term
of three years.
The following table sets forth information with respect to our Board
of Supervisors and executive officers as of June 24, 2000:
NAME AGE POSITION
---- --- --------
Mark A. Alexander......... 41 President and Chief Executive Officer;
appointed member of the Board of Supervisors
Michael J. Dunn, Jr....... 51 Senior Vice President -- appointed member of
the Board of Supervisors
David R. Eastin........... 42 Chief Operating Officer
Michael M. Keating........ 47 Vice President -- Human Resources and
Administration
Edward J. Grabowiecki..... 38 Vice President, Controller and Chief
Accounting Officer
Jeffrey S. Jolly.......... 47 Vice President and Chief Information Officer
Robert M. Plante.......... 52 Vice President and Treasurer
Janice G. Meola........... 34 General Counsel and Secretary
John Hoyt Stookey......... 69 Chairman and elected member of the Board of
Supervisors
Harold R. Logan, Jr....... 55 Elected member of the Board of Supervisors
Dudley C. Mecum........... 64 Elected member of the Board of Supervisors
Mark J. Anton............. 73 Supervisor Emeritus
Mr. Alexander serves as our President and Chief Executive Officer and
as an appointed member of our Board of Supervisors, having previously served for
six months as our Executive Vice Chairman and Chief Executive Officer. Mr.
Alexander was Senior Vice President -- Corporate Development of Hanson
Industries, Hanson's management division in the United States, from 1995 until
March 4, 1996, where he was responsible for mergers and acquisitions, real
estate and divestitures, and was Vice President of Acquisitions from 1989 to
1995. He was an Associate Director of Hanson from 1993 and a Director of Hanson
Industries from June 1995 until March 4, 1996. Mr. Alexander also has served as
the Chairman of the Board of Managers of Suburban Energy Services Group LLC
since May 1999. He is also a director-at-large of the National Propane Gas
Association and a member of its Executive Committee. He is President of the
Coalition for Fair Competition in Rural Markets and Chairman of Research and
Development of the Advisory Committee for the Propane Education and Research
Council.
Mr. Dunn serves as our Senior Vice President and as an appointed
member of our Board of Supervisors. Mr. Dunn was our Vice President --
Procurement and Logistics from March 1997 until June 1998. Mr. Dunn was Vice
President of Commodity Trading for Goldman Sachs & Company from 1981 until he
joined us in 1997. Mr. Dunn also has served on the board of managers of our
general partner, Suburban Energy Services Group LLC, since May 1999.
Mr. Eastin serves as our Chief Operating Officer. Prior to joining us
in May 1999, Mr. Eastin was employed for seven years by Star Gas Propane LP,
holding the positions of Vice President, Operations, Director of Eastern
Operations and Regional Manager. From 1980 to 1992, Mr. Eastin served as Area
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Manager and District Manager at Ferrellgas Partners, L.P. and its predecessor
company, Buckeye Gas Products Company.
Mr. Keating has served as our Vice President -- Human Resources and
Administration since July 1996. Mr. Keating was Director of Human Resources at
Hanson Industries from 1993 to July 1996 and was Director of Human Resources and
Corporate Personnel at Quantum Chemical Corporation.
Mr. Grabowiecki serves as our Vice President, Controller and Chief
Accounting Officer. He has served as our Controller and Chief Accounting Officer
since October 1996 and became a Vice President in October 1999. He previously
was Director of Accounting Services from January 1996 to September 1996. Prior
to joining us, Mr. Grabowiecki was a regional controller for Discovery Zone,
Inc. from June 1993 to January 1996. Mr. Grabowiecki held several positions at
Ernst & Young from 1984 to 1993, including Senior Manager from 1992 to 1993.
Mr. Jolly serves as our Vice President and Chief Information Officer.
He has served as our Chief Information Officer since May 1999, having previously
served as Vice President Information Services since July 1997. Mr. Jolly was
employed as Vice President Information Systems at The Wood Company from 1993 to
1997. From 1989 to 1993, he was employed by Johanna Dairies, Inc. and Alpo Pet
Foods Inc. for four and one years, respectively.
Mr. Plante serves as our Vice President and Treasurer. He has served
as a Vice President since October 1999 and as Treasurer since March 1996. Mr.
Plante was our Director of Financial Services from 1993 to 1996 and has held
various other management positions with us since 1977.
Ms. Meola serves as our General Counsel and Secretary. She served as
Counsel from July 1998 to May 1999 and as Associate Counsel from September 1996
to July 1998. Prior to joining us, Ms. Meola was employed as Environmental
Counsel for the CNA Insurance Companies and its predecessor, Continental
Insurance Company, from 1994 to 1996. From 1992 to 1994, she was employed by
Bumgardner, Hardin & Ellis as a litigation associate. She served as a judicial
clerk to the Honorable Arthur N. D'Italia, A.J.S.C., during the 1991 to 1992
court term.
Mr. Stookey has served as an elected member and Chairman of our Board
of Supervisors since March 5, 1996. He served as the non-executive Chairman and
a director of Quantum Chemical Corporation from the time it was acquired by
Hanson Industries on September 30, 1993 to October 31, 1995. From 1986 to
September 30, 1993, he was the Chairman, President and Chief Executive Officer
of Quantum. He is also a director of United States Trust Company of New York and
ACX Technologies, Inc.
Mr. Logan has served as an elected member of our Board of Supervisors
since March 5, 1996. Mr. Logan has served as Executive Vice President --
Finance, Treasurer and a Director of TransMontaigne Inc. since 1995.
TransMontaigne Inc. was formed to provide logistical services, i.e., pipeline,
terminaling and marketing to producers and end users of refined petroleum
products. He served as Senior Vice President of Finance and a director of
Associated Natural Gas Corporation, an independent gatherer and marketer of
natural gas, natural gas liquids and crude oil, which in 1994 was acquired by
Panhandle Eastern Corporation, from 1987 until 1995. Mr. Logan is also a
director of Santa Fe Snyder Corporation and Union Bankshares Ltd.
Mr. Mecum has served as an elected member of our Board of Supervisors
since June 1996. Mr. Mecum 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 also a director of Lyondell
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Chemical Co., Dyncorp., Vicorp Restaurants, Inc., CitiGroup, Inc., Travelers
Property Casualty Corporation and CCC Information Systems Inc.
Mr. Anton has served as Supervisor Emeritus of our 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 and a former Executive Vice President of Quantum Chemical
Corporation.
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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 June 24, 2000, we had 22,278,587 common units outstanding.
Suburban Energy Services Group LLC, our general partner, owns a 1.0% general
partner interest in us and a 1.0101% general partner interest in 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 common units
are not entitled. However, we may not issue equity securities senior to the
common units or an aggregate of more than 9,375,000 additional common units or
other units having rights to distributions or in liquidation ranking on a parity
with the common units or equivalent units at any time prior to March 31, 2001,
without the prior approval of at least a majority of the outstanding common
units. This limitation does not apply, however, to the issuance of additional
common units or parity securities in connection with certain accretive
acquisitions or to finance capital improvements or if the proceeds are used to
repay indebtedness.
LISTING
Our common units are listed on the NYSE under the symbol "SPH".
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.
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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% to common unitholders, pro rata, and 2% to the
general partner, until all common unitholders have received
the minimum quarterly distribution of $0.50 per unit, any
arrearages in minimum quarterly distributions on the common
units from prior quarters, and an amount equal to the excess
of the target distribution of $0.55 per unit over the minimum
quarterly distribution; and
o thereafter, 85% to all common unitholders, pro rata, 13% to
the general partner pursuant to its incentive distribution
rights and 2% to the general partner in respect of its general
partnership interest.
After the fiscal quarter ending March 31, 2001, the priorities will be the same,
except that common units will no longer be entitled to arrearages.
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 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
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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.
For a table showing our distribution history, see "Price Range of
Common Units and Cash Distributions".
LIQUIDITY ARRANGEMENT
Our partnership agreement requires that we maintain, through the
distribution date for the quarter ending December 31, 2000, $22.0 million,
reduced by allowable subsequent borrowings, of committed availability under the
working capital portion of our bank credit facility to support the minimum
quarterly distribution.
After the above-referenced distribution date and through the
distribution date for the quarter ending March 31, 2001, we are required to
maintain the lesser of (1) $11.6 million and (2) $22.0 million less any amounts
previously borrowed and any additional allowable subsequent borrowings.
Generally, if operating surplus, adjusted to disregard changes in
operating balance sheet accounts, including changes relating to borrowings for
working capital purposes, other than borrowings that are distributed to
unitholders, is less than the aggregate minimum quarterly distribution for the
previous four fiscal-quarter period -- that is, a "distribution shortfall" --
and we have insufficient borrowing capacity under its general working capital
facility, any borrowings to pay the minimum quarterly distribution will be
deemed to be drawdowns of the liquidity arrangement and will permanently reduce
the liquidity arrangement. (These borrowings will be distributed to the extent
permitted by our contracts and securities.) Any other borrowings to pay the
minimum quarterly distribution will be deemed to be regular working capital
borrowings and, therefore, will not reduce the liquidity arrangement.
The amount of required availability under the liquidity arrangement
will be permanently reduced by any amount borrowed under it, even if the amount
borrowed is repaid. We are, in effect, setting aside some of our own resources
that could otherwise have been used for distributions, working capital needs or
other purposes, which may adversely affect our operations. Consequently, the
cost of the liquidity arrangement, if used, will be indirectly born by the
unitholders.
There is an exception if the amount of the available cash from
operating surplus is insufficient to distribute the minimum quarterly
distribution in any fiscal quarter when, looking back over the preceding four
fiscal quarters, including the fiscal quarter in question, the aggregate amount
of available cash from operating surplus (adjusted as described above) for that
four-fiscal quarter period was less than the aggregate minimum quarterly
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distribution for that four-fiscal quarter period. In that event, before using
the liquidity arrangement, we will draw on a management reserve, established
through the fiscal quarter ending March 31, 2001, comprised of the quarterly
distributions paid on certain common units held in a benefits protection trust
established pursuant to a compensation deferral plan for the benefit of officers
and senior management who are owners of the general partner.
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. We have discretion to withhold consent to
transfer.
TRANSFER AGENT AND REGISTRAR
Our transfer agent and registrar for the common units is
Equiserve-First Chicago Trust Division. Their address is Mail Suite 4690, P.O.
Box 2532, Jersey City, NJ 07303-2532.
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OUR PARTNERSHIP AGREEMENT
ORGANIZATION
We are a Delaware limited partnership. Our general partner is
Suburban Energy Services Group LLC, an entity owned by approximately 45 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 units
present and voting, in person or by proxy, at the tri-annual meeting of
unitholders. 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).
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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 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
owns 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
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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.
Nevertheless, the general partner may pledge its interests as general
partner to Mellon Bank, N.A. solely for the purpose of securing, directly or
indirectly, indebtedness of the general partner in connection with a loan from
Mellon Bank in the amount of $6.0 million. In addition, 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
Distributions Rights," above.
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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 the 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.
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 unitholders 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
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Supervisors without approval by the common unitholders. 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
This section is a summary of the material federal income tax
considerations that may be relevant to prospective unitholders and, to the
extent set forth below under "-- Legal Opinions", expresses the opinion of Weil,
Gotshal & Manges LLP, our tax counsel, insofar as it relates to matters of law
and legal conclusions. 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 substantially from the consequences described
below. As the context otherwise requires, references in this section to "us" are
references to either Suburban or the Operating Partnership.
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 individual citizens or residents of
the United States and has only limited application to corporations, estates,
trusts, non-resident aliens or other unitholders subject to specialized tax
treatment, such as tax-exempt institutions, foreign persons, individual
retirement accounts, REITs or mutual funds. 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, in a manner that
would affect the 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 representations and subject to the qualifications set forth in
the detailed discussion that follows, for federal income tax purposes (i)
Suburban and the Operating Partnership will each be treated as a partnership,
and (ii) owners of common units, with certain exceptions, as described in
"--Limited Partner Status" below, will be treated as partners of Suburban, but
not the Operating Partnership. In addition, all statements as to matters of law
and legal conclusions contained in this section, unless otherwise noted, reflect
the opinion of counsel as of the date hereof. All references to "us," "we" or
"our" are to either Suburban or the Operating Partnership and not to Weil,
Gotshal & Manges LLP.
We have not requested, and do not expect to request, 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 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 or indirectly by the unitholders
and the general partner. 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.
For the reasons hereinafter described, counsel has not rendered an
opinion with respect to the following specific federal income tax issues:
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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 Unitholders--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
A partnership is not a taxable entity and incurs no 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 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. In
rendering its opinion, counsel has relied on certain factual representations
made by Suburban and the general partner. Such factual matters are as follows:
o Neither Suburban nor the Operating Partnership has elected or
will elect to be treated as an association or corporation;
o Suburban and the Operating Partnership have been and will be
operated in accordance with:
o all applicable partnership statutes;
o the partnership agreement or operating partnership
agreement (whichever is applicable); and
o the description of the applicable agreement in this
prospectus; and
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o For each taxable year, more than 90% of our gross income will
be derived from:
o the exploration, development, production, processing,
refining, transportation or marketing of any mineral
or natural resource, including oil, gas or products
thereof; or
o other items of "qualifying income" within the meaning
of Section 7704(d) of the Internal Revenue Code.
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 crude oil, natural
gas, and products thereof, including the retail and wholesale marketing of
propane, certain hedging activities and the transportation of propane and
natural gas liquids. 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.
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 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 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 would reduce 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 federal income tax purposes.
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TAX TREATMENT OF UNITHOLDERS
LIMITED PARTNER STATUS
Unitholders who have become limited partners will be treated as our
partners for federal income tax purposes. Counsel is of the opinion that
assignees who have executed and delivered transfer applications, and are
awaiting admission as limited partners, and 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.
Because there is no direct authority addressing assignees of common units who
are entitled to execute and deliver transfer applications and thereby become
entitled to direct the exercise of attendant rights, but who fail to execute and
deliver transfer applications, it is not clear whether such assignees will be
treated as partners of Suburban for federal income tax purposes. Furthermore, a
purchaser or other transferee of common units who does not execute and deliver a
transfer application may not receive certain federal income tax information or
reports furnished to record holders of common units unless the common units are
held in a nominee or street name account and the nominee or broker has executed
and delivered a transfer application with respect to such common units.
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 Unitholders--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 would 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 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.
TREATMENTS 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.
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," will be treated as a distribution of cash to that
unitholder. 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".
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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, 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 for
purposes of the alternative minimum tax. A portion of our depreciation
deductions may be treated as an item of tax preference for this purpose. A
unitholder's alternative minimum taxable income derived from us may be higher
than his share of our net income because we may 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. 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. 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 and by the unitholder's share
of our expenditures that are not deductible in computing our taxable income and
are not required to be capitalized. A 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. 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. A unitholder must recapture losses deducted in previous
years to the extent that our distributions cause the unitholder's at risk amount
to be less than zero at the end of any taxable year. 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
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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 limitations 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.
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 passive activity. Consequently, any
passive losses we generate will only be available to offset future income
generated by us and will not be available to offset income from other passive
activities or investments, including other publicly-traded partnerships, 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 non-corporate taxpayer's "investment interest
expense" is generally limited to the amount of such taxpayer's "net investment
income." As noted, a unitholder's net passive income from us will be treated as
investment income for this purpose. In addition, the unitholder's share of our
portfolio income will be treated as investment income. Investment interest
expense includes:
o interest on indebtedness properly allocable to property held
for investment;
o our interest expense attributed 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 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 unless the unitholder waives the benefit of the lower tax
rates on such gain.
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 common unitholders and our general partner and not
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to the holders of incentive distribution rights, or that incentive 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 income in excess of the amount distributed to it, possibly
without a corresponding allocation of a deduction for the payment to the holder
of the incentive distribution right. 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 its 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. The effect of these allocations to a unitholder purchasing common
units pursuant to this 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.
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 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.
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 agreements will be
given effect for federal income tax purposes in determining a partner's
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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.
INITIAL 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 "--Tax Treatment of Unitholders--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 "--Tax
Treatment of Unitholders--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 Internal Revenue
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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 its share of our
adjusted basis in our assets 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.
Effective for transfers of partnership interests occurring on or
after December 15, 1999, 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.
However, the regulations under Section 197 indicate that the Section
743(b) adjustment attributable to a Section 197 intangible should be treated as
a newly-acquired asset placed in service in the month when the purchaser
acquires the common unit. Furthermore, under Treasury Regulation Section
l.167(c)-l(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 either the straight-line method or the 150%
declining balance 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 is consistent
with the regulations under Section 743, but arguably inconsistent with Treasury
Regulation Section 1.167(c)-1(a) (6), which is not expected to directly apply to
a material portion of our assets, and Treasury Regulation Section 1.197-2(g)
(3). 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 and legislative history.
If we determine 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. 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.
Goodwill, as an intangible asset, would be amortizable over a longer period of
time than our tangible assets.
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A section 754 election is advantageous if the transferee's tax basis
in his common units in higher than such common units' share of the aggregate tax
basis of our assets 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 and depletion 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 the aggregate tax basis of our assets 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 distributions, so that
after giving effect to such distributions, the priority and characterization of
distributions otherwise applicable under our partnership agreement is 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
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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."
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.
Prior distributions from us in excess of cumulative net taxable
income allocated for 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 20%. 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. The ruling is unclear as to how
the holding period of these interests is determined once they are combined. 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 clear whether 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. 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.
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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 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 is a citizen of the United States and who effects
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the sale or exchange through a broker. Additionally, a transferee of a common
unit will be required to furnish a statement to the IRS, filed with its income
tax return for the taxable year in which the sale or exchange occurred, that
sets forth the amount of the consideration paid for the common unit. In
addition, because we have made an election under Section 754 of the Internal
Revenue Code, a purchaser of an interest in us 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 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 could 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.
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 federal income tax requirements, both statutory and
regulatory, could be substantially diminished. A lack of uniformity can result
from the application of the "ceiling limitation" to our ability to make
allocations to eliminate Book-Tax disparities and a literal application of
Treasury Regulation Section 1.167(c)-1(a)(6) and Treasury Regulation Section
1.197-2(g)(3) to our Section 743(b) adjustments. Any non-uniformity could have a
negative impact on the value of the common units. See "--Tax Treatment of
Operations--Section 754 Election."
Although counsel is unable to opine on the validity of this method,
we depreciate the portion of a Section 743(b) adjustment attributable to
unrealized appreciation in the value of contributed property or adjusted
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
is consistent with the regulations under Section 743, but is arguably
inconsistent with Treasury Regulation Section 1.167(c)-1(a) (6), which is not
expected to directly apply to a material portion of our assets, and Treasury
Regulation Section 1.197-2(g)(3). See "--Tax Treatment of Operations--Section
754 Election." To the extent such Section 743(b) adjustment is attributable to
appreciation in value in excess of the unamortized Book-Tax Disparity, we apply
the rules described in the Treasury Regulations and legislative history. If we
determine that this position cannot reasonably be taken, we may adopt a
depreciation and amortization convention under which all purchasers acquiring
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common units in the same month would receive depreciation and amortization
deductions, whether attributable to common basis or Section 743(b) basis, based
upon the same applicable rate as if they had purchased a direct interest in our
property. If such an aggregate approach is adopted, it may result in lower
annual depreciation and 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 "--Disposition of Common
Units--Recognition of Gain or Loss."
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.
Non-resident 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, we will withhold taxes (currently at the rate of 39.6%) 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.
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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 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 Substitute
Schedule K-1, which sets forth such unitholder's share of our 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 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
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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 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 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
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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 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.
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, 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
it 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
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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. 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 non-resident 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, 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.
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UNDERWRITING
We and Goldman, Sachs & Co. have entered into an underwriting
agreement with respect to the units being offered. Subject to certain
conditions, Goldman, Sachs & Co. has agreed to purchase all of the units.
If Goldman, Sachs & Co. sells more units than the total number being
offered, Goldman, Sachs & Co. has an option to buy up to an additional 325,000
units from us to cover such sales. It may exercise that option for 30 days.
The following table shows the per unit and total underwriting
discount to Goldman, Sachs & Co. Those amounts are shown assuming both no
exercise and full exercise of Goldman, Sachs & Co.'s option to purchase 325,000
additional units.
Paid by Suburban Propane Partners
---------------------------------
No Exercise Full Exercise
----------- -------------
Per Unit.. $ $
Total......... $ $
Units sold by Goldman, Sachs & Co. to the public will initially be
offered at the offering price set forth on the cover of this prospectus. Any
units sold by Goldman, Sachs & Co. to securities dealers may be sold at a
discount of up to $ per unit from the initial price to public. Any of the
securities dealers may resell any units purchased from Goldman, Sachs & Co. to
other brokers or dealers at a discount of up to $_____ per unit from the initial
price to public. If all the units are not sold at the initial price to public,
Goldman, Sachs & Co. may change the offering price and the other selling terms.
We, our officers and the members of our Board of Supervisors have
agreed with Goldman, Sachs & Co. not to dispose of or hedge any of the units,
securities similar to the units or securities convertible into or exchangeable
for the units during the period from the date of this prospectus continuing
through the date 90 days after the date of this prospectus, except with the
prior written consent of Goldman, Sachs & Co. These agreements do not apply to
the acquisition of assets, businesses or the capital stock or other ownership
interests of businesses by us in exchange for units, if the recipient of units
agrees not to dispose of any units received in connection with the acquisition
during that period. These agreements also do not apply to any existing employee
benefit plans or unit option plans.
In connection with the offering, Goldman, Sachs & Co. may purchase
and sell 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 Goldman, Sachs & Co. of a greater number
of units than it is required to purchase in the offering. "Covered" short sales
are sales made in an amount not greater than Goldman, Sachs & Co.'s
overallotment option to purchase additional units from us in the offering.
Goldman, Sachs & Co. may close out any covered short position by either
exercising its overallotment option or purchasing units in the open market. In
determining the source of units to close out the covered short position,
Goldman, Sachs & Co. will consider, among other things, the price of units
available for purchase in the open market as compared to the price at which they
may purchase units through exercise of the overallotment option. "Naked" short
sales are any sales in excess of the overallotment option. Goldman, Sachs & Co.
must close out any naked short position by purchasing units in the open market.
A naked short position is more likely to be created if Goldman, Sachs & Co. is
concerned that there may be downward pressure on the price of the units in the
open market after pricing that could adversely affect investors who purchase in
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the offering. Stabilizing transactions consist of various bids for or purchases
of units made by Goldman, Sachs & Co. in the open market prior to the completion
of the offering.
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 may stabilize, maintain or otherwise affect the market price
of the common units. As a result, the price of the 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
$500,000.
We have agreed to indemnify Goldman, Sachs & Co. against certain
liabilities, including liabilities under the Securities Act of 1933.
LEGAL OPINIONS
The validity of the common units and other legal and tax matters
relating to the common units are being passed upon for us by Weil, Gotshal &
Manges LLP, New York, New York. Certain legal matters with respect to the common
units will be passed upon for Goldman, Sachs & Co. by Vinson & Elkins L.L.P.,
New York, New York.
EXPERTS
The financial statements incorporated in this prospectus by reference
to our Annual Report on Form 10-K for the fiscal year ended September 25, 1999
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.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Securities
Exchange Act of 1934. As a result, we file reports and other information with
the SEC. You may read and copy the reports, proxy statements and other
information we file with the SEC at the SEC's public reference facilities at
Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549. You
may obtain information on the operation of the public reference facilities by
calling the SEC at 1-800-SEC-0330. You may also obtain information about us from
the following regional offices of the SEC: 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and 7 World Trade Center, 13th Floor, New York, New York
10048. Copies of these materials can be obtained at prescribed rates. Our
filings with the SEC are also available on the SEC's home page on the Internet
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 documents 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.
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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 Annual Report on Form 10-K for the fiscal year ended
September 25, 1999;
o our Quarterly Reports on Form 10-Q for the fiscal quarters
ended December 25, 1999 and March 25, 2000;
o our Current Reports on Form 8-K filed on October 12, 1999,
November 17, 1999 and January 21, 2000; 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.
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, NJ 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 common units
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 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
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statements are discussed in the "Risk Factors" section of this prospectus, which
begins on page 6. You should not put undue reliance on any forward-looking
statements.
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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. You must
not rely on any unauthorized information or representations. This prospectus 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 is current only as of its date.
----------
TABLE OF CONTENTS
Page
----
Prospectus Summary....................................... 1
Risk Factors............................................. 6
Use of Proceeds.......................................... 15
Price Range of Common Units
and Cash Distributions............................... 16
Capitalization........................................... 17
Selected Financial Data.................................. 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations........................................ 20
Business................................................. 28
Management............................................... 33
Description of Common Units.............................. 36
Our Partnership Agreement................................ 40
Tax Considerations....................................... 45
Underwriting............................................. 63
Legal Options............................................ 64
Experts.................................................. 64
Where you Can Find More Information...................... 64
Incorporation of Certain Documents
by Reference......................................... 65
Forward-Looking Statements............................... 65
================================================================================
================================================================================
2,175,000 Common Units
Representing Limited Partner Interests
SUBURBAN PROPANE
PARTNERS, L.P.
Goldman, Sachs & Co.
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
All capitalized terms used and not defined in Part II of this
Registration Statement shall have the meanings assigned to them in the
Prospectus which forms a part of this Registration Statement.
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses to be paid by Suburban in connection with the
distribution of the securities being registered are as set forth in the
following table:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee................... $ 13,860
NASD filing fee....................................................... 5,750
*Legal fees and expenses................................................
*Accounting fees and expenses...........................................
*Printing expenses......................................................
*Transfer agent fees & expenses.........................................
*Miscellaneous..........................................................
---------------
*Total............................................................... $
===============
</TABLE>
--------
*To be supplied by amendment
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our partnership agreement provides that Suburban will indemnify (i)
the members of the Board of Supervisors or the members of the Board of
Supervisors of the Operating Partnership or any subsidiary of the Operating
Partnership, (ii) the general partner, (iii) any departing partner, (iv) any
person who is or was an affiliate of the general partner or any departing
partner, (v) any person who is or was a member, partner, director, officer,
employee, agent or trustee of Suburban, the Operating Partnership or any
subsidiary of the Operating Partnership, (vi) any person who is or was a member,
partner, officer, director, employee, agent or trustee of the general partner or
any departing partner or any affiliate of the general partner or any departing
partner, or (vii) any person who is or was serving at the request of the Board
of Supervisors, the general partner or any departing partner or any affiliate of
the general partner or any departing partner as a member, partner, director,
officer, employee, partner, agent, fiduciary or trustee of another person
("Indemnitees"), to the fullest extent permitted by law, from and against any
and all losses, claims, damages, liabilities (joint or several), expenses
(including legal fees, expenses and other disbursements), judgments, fines,
penalties, interest, settlements or other amounts arising from any and all
claims, demands, actions, suits or proceedings, whether civil, criminal,
administrative or investigative, in which any Indemnitee may be involved, or is
threatened to be involved, as a party or otherwise, by reason of its status as
an Indemnitee; provided that in each case the Indemnitee acted in good faith and
in a manner that such Indemnitee reasonably believed to be in or not opposed to
the best interests of Suburban and, with respect to any criminal proceeding, had
no reasonable cause to believe its conduct was unlawful. Any indemnification
under these provisions will be only out of the assets of Suburban, and the
general partner shall not be personally liable for, or have any obligation to
contribute or loan funds or assets to Suburban to enable it to effectuate, such
indemnification. Suburban is authorized to purchase (or to reimburse the general
partner or its affiliates for the cost of) insurance against liabilities
asserted against and expenses incurred by such persons in connection with
Suburban's activities, regardless of whether Suburban would have the power to
indemnify such person against such liabilities under the provisions described
above.
II-1
<PAGE>
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and/or persons
controlling the registrant pursuant to the foregoing provision, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
ITEM 16. EXHIBITS
Exhibit No. Description
----------- -----------
1.1 Form of Underwriting Agreement.
2.1 Recapitalization Agreement dated as of November 27, 1998 by
and among Suburban, the Operating Partnership, the general
partner, Millennium Chemicals, Inc. and Suburban Energy
Services Group LLC (filed as Exhibit 2.1 to the Partnership's
Current Report on Form 8-K filed December 3, 1998).**
3.1 Amended and Restated Agreement of Limited Partnership of
Suburban dated as of March 4, 1996 (filed as Exhibit 3.1 to
the Partnership's Current Report on Form 8-K filed on April
29, 1996 (the "April 29 Form 8-K").**
3.2 Amended and Restated Agreement of Limited Partnership of the
Operating Partnership dated as of March 4, 1996. (filed as
Exhibit 3.2 to the April 29 Form 8-K)**
3.3 Second Amended and Restated Agreement of Limited Partnership
of Suburban Propane Partners, L.P. (filed as Annex C to the
Partnership's Proxy Statement dated April 22, 1999).**
5.1 Opinion of Weil, Gotshal & Manges LLP as to the legality of
the securities registered hereby.*
8.1 Form of Opinion of Weil, Gotshal & Manges LLP as to tax
matters.
21.1 Listing of Subsidiaries of Suburban (filed as Exhibit 21.1 to
the Partnership's Annual Report on Form 10-K for the fiscal
year ended September 25, 1999).**
23.1 Consent of Independent Accountants.
23.2 Consent of Weil, Gotshal & Manges LLP (to be included in the
Opinion filed as Exhibit 5.1).
24.1 Power of Attorney (included on signature page to Registration
Statement).
-------------------------------------------
* To be filed by amendment.
** Incorporated by reference.
II-2
<PAGE>
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes that, for purposes
of determining any liability under the Securities Act of 1933, each filing of
the registrant's annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability
under the Securities Act of 1933, the information omitted
from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this
registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability
under the Securities Act of 1933, each post-effective
amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the
securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-3
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SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Whippany, State of New Jersey, on July 31, 2000.
SUBURBAN PROPANE PARTNERS, L.P.
By: /s/ MARK A. ALEXANDER
----------------------------------
Mark A. Alexander
President, Chief Executive Officer
and Appointed Supervisor
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated. Each person whose name appears below
hereby constitutes Janice G. Meola such person's true and lawful attorney, with
full power of substitution to sign for such person and in such person's name and
capacity indicated below, any and all amendments to this Registration Statement,
including Post-Effective Amendments, and to file the same with the Securities
and Exchange Commission, hereby ratifying and confirming such person's signature
as it may be signed by said attorney to any and all amendments.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ MARK A. ALEXANDER President and Chief Executive Officer; July 31, 2000
--------------------------------------- Appointed Member of the Board of
Mark A. Alexander Supervisors (Principal Executive
Officer)
/s/ MICHAEL J. DUNN JR. Appointed Member of the Board of July 31, 2000
--------------------------------------- Supervisors
Michael J. Dunn, Jr.
/s/ JOHN HOYT STOOKEY Elected Member and Chairman of the July 30, 2000
--------------------------------------- Board of Supervisors
John Hoyt Stookey
/s/ HAROLD R. LOGAN, JR. Elected Member of the Board of July 31, 2000
--------------------------------------- Supervisors
Harold R. Logan, Jr.
/s/ DUDLEY C. MECUM Elected Member of the Board of July 31, 2000
--------------------------------------- Supervisors
Dudley C. Mecum
/s/ EDWARD J. GRABOWIECKI Vice President, Controller and Chief July 31, 2000
--------------------------------------- Accounting Officer (Principal
Edward J. Grabowiecki Accounting Officer)
</TABLE>
II-4
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description
----------- -----------
1.1 Form of Underwriting Agreement.
2.1 Recapitalization Agreement dated as of November 27, 1998 by
and among Suburban, the Operating Partnership, the general
partner, Millennium Chemicals, Inc. and Suburban Energy
Services Group LLC (filed as Exhibit 2.1 to the Partnership's
Current Report on Form 8-K filed December 3, 1998).**
3.1 Amended and Restated Agreement of Limited Partnership of
Suburban dated as of March 4, 1996 (filed as Exhibit 3.1 to
the Partnership's Current Report on Form 8-K filed on April
29, 1996 (the "April 29 Form 8-K").**
3.2 Amended and Restated Agreement of Limited Partnership of the
Operating Partnership dated as of March 4, 1996. (filed as
Exhibit 3.2 to the April 29 Form 8-K)**
3.3 Second Amended and Restated Agreement of Limited Partnership
of Suburban Propane Partners, L.P. (filed as Annex C to the
Partnership's Proxy Statement dated April 22, 1999).**
5.1 Opinion of Weil, Gotshal & Manges LLP as to the legality of
the securities registered hereby.*
8.1 Form of Opinion of Weil, Gotshal & Manges LLP as to tax
matters.
21.1 Listing of Subsidiaries of Suburban (filed as Exhibit 21.1 to
the Partnership's Annual Report on Form 10-K for the fiscal
year ended September 25, 1999).**
23.1 Consent of Independent Accountants.
23.2 Consent of Weil, Gotshal & Manges LLP (to be included in the
Opinion filed as Exhibit 5.1).
24.1 Power of Attorney (included on signature page to Registration
Statement).
-------------------------------------------
* To be filed by amendment.
** Incorporated by reference.
