SUBURBAN PROPANE PARTNERS LP - Quarter Report: 2005 December (Form 10-Q)

first quarter of fiscal 2006 compared to 65.9 million gallons in the prior year quarter. Our volumes continue to be negatively impacted by customer conservation efforts during this sustained period of high commodity prices resulting in higher energy costs to the consumer. In addition, in the propane segment, we have consciously focused on higher margin residential customers and, in several instances, exited certain lower margin commercial, industrial and agricultural customers, thus reducing our reported volume yet improving our overall profitability. In the fuel oil and refined fuels segment, while volumes have been negatively affected by customer losses as a result of our decision to eliminate the Ceiling Program, as well as from our continued efforts to exit certain lower margin diesel and gasoline business, our overall margin improvement has offset much of the volume shortfall.

Average temperatures in our service territories were 5% warmer than normal for the three months ended December 24, 2005, compared to 6% warmer than normal temperatures in the prior year quarter. Significantly warmer than normal temperatures during the first two months of the first quarter of fiscal 2006 were offset by sustained colder than normal temperatures during the month of December 2005. In the commodities markets, the high propane and fuel oil prices experienced throughout fiscal 2005 continued during the fiscal 2006 first quarter. Average posted prices of propane and fuel oil during the first quarter of fiscal 2006 of $1.064 per gallon and $1.8025 per gallon, respectively, increased 25% and 30%, respectively, compared to the average posted prices in the prior year quarter.

During the first quarter of fiscal 2006, we took further steps to implement our field realignment plan which began during the fourth quarter of fiscal 2005. Under the field realignment plan, we have (i) eliminated 85 positions since the beginning of the fourth quarter of fiscal 2005; (ii) consolidated the regional management structure from nineteen to ten regions; (iii) begun to streamline our operating footprint with the consolidation of our customer service centers within each region; and, (iv) standardized many of the routing and forecasting activities within the customer service centers for improved operational efficiency through better management of our assets. As a result, the increases in combined operating and general and administrative expenses that typically occur with the increased earnings, particularly in our variable expenses, were offset to an extent by cost savings realized during the early stages of the field realignment.

For the three months ended December 24, 2005, profitability in all of our reportable segments improved with our propane segment increasing $6.5 million, or 15.7%, compared to the prior year quarter. Profitability in the fuel oil and refined fuels segment and the natural gas and electricity segment for the three months ended December 24, 2005 increased $9.2 million (148.4%) and $2.0 million (372%), respectively, compared to the prior year quarter.

Looking ahead to the remainder of fiscal 2006, our operations may be negatively impacted by a recent shift to significantly warmer than normal temperatures coupled with a continued high commodity price environment. The colder than normal temperatures experienced during December 2005 have shifted to near record warm temperatures for the month of January 2006 as the average temperatures in our service territories for January 2006 were 25% warmer than normal compared to 9% warmer than normal in January 2005. However, we continue to focus on those factors that are within our control, including continued improvement in margin opportunities in our fuel oil operations from the elimination of the fuel oil Ceiling Program, as well as continued cost savings and efficiencies anticipated from the field realignment. With these positive steps and a return to a more normal weather pattern for the remainder of the heating season, we expect an improvement in operating results compared to the prior year.

Our anticipated cash requirements for the remainder of fiscal 2006 include: (i) maintenance and growth capital expenditures of approximately $23.8 million; (ii) interest payments of approximately $31.4 million; (iii) repayment of outstanding borrowings of $48.0 million under our Revolving Credit Agreement; and, (iv) distributions of approximately $57.5 million to Common Unitholders and the General Partner. Based on our current estimates of cash flow from operations, our cash position at the end of the first quarter of fiscal 2006 and availability under the Revolving Credit Agreement (unused borrowing capacity under the working capital facility of $58.8 million at December 24, 2005), we expect to have sufficient funds to meet our current and future obligations.

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Results of Operations

Three Months Ended December 24, 2005 Compared to Three Months Ended December 25, 2004

Revenues

(Dollars in thousands)				Three Months Ended								Increase (Decrease)				Percent Increase (Decrease)
				December 24, 2005				December 25, 2004
Revenues
Propane				$	310,292			$	259,436			$	50,856				19.6	%
Fuel oil and refined fuels					105,305				108,260				(2,955	)			(2.7	%)
Natural gas and electricity					37,943				22,488				15,455				68.7	%
HVAC					31,227				32,170				(943	)			(2.9	%)
All other					2,696				1,692				1,004				59.3	%
Total revenues				$	487,463			$	424,046			$	63,417				15.0	%

Total revenues increased $63.4 million, or 15%, to $487.5 million for the three months ended December 24, 2005 compared to $424.0 million for the three months ended December 25, 2004, driven primarily by higher average selling prices resulting from significantly higher commodity prices, offset to an extent by lower volumes in our propane and fuel oil and refined fuels segments. Significantly warmer than normal temperatures during the first two months of the first quarter of fiscal 2006 were offset by sustained colder than normal temperatures during the month of December 2005. As a result, average temperatures in our service territories were 5% warmer than normal for the three months ended December 24, 2005 compared to 6% warmer than normal temperatures in the prior year quarter, as reported by the National Oceanic and Atmospheric Administration. In the commodities markets, the high propane and fuel oil prices experienced throughout fiscal 2005 continued during the first quarter of fiscal 2006, thus continuing to negatively impact volumes as a result of customer conservation.

Revenues from the distribution of propane and related activities of $310.3 million in the first quarter of fiscal 2006 increased $50.9 million, or 19.6%, compared to $259.4 million in the prior year quarter, primarily due to the impact of higher average selling prices in line with significantly higher product costs, offset to an extent by the impact of lower volumes. Retail propane gallons sold in the first quarter of fiscal 2006 decreased 8.0 million gallons, or 5.6%, to 133.8 million gallons from 141.8 million gallons in the prior year quarter. Propane volumes sold were negatively affected by customer conservation efforts, as well as a conscious effort to focus on higher margin residential customers and, in several instances, to exit certain lower margin commercial, industrial and agricultural customers, thus reducing our reported volume yet improving our overall profitability with an improved customer mix. Average propane selling prices increased approximately 20% as a result of higher commodity prices for propane. The average posted price of propane during the first quarter of fiscal 2006 increased approximately 25% compared to the average posted prices in the prior year quarter. Additionally, included within the propane segment are revenues from wholesale and risk management activities of $22.9 million for the three months ended December 24, 2005 which increased $18.8 million compared to the prior year quarter.

Revenues from the distribution of fuel oil and other refined fuels of $105.3 million in the first quarter of fiscal 2006 decreased $3.0 million, or 2.7%, from $108.3 million in the prior year quarter. Sales of fuel oil and other refined fuels amounted to 43.8 million gallons during the first quarter of fiscal 2006 compared to 65.9 million gallons in the prior year quarter, a decrease of 22.1 million gallons, or 33.5%. Lower volumes in our fuel oil and refined fuels segment were attributable primarily to our continued efforts to exit certain lower margin diesel and gasoline businesses combined with the impact of high prices on fuel oil volumes, as well as the impact on volumes from the decision to eliminate the fuel oil Ceiling Program. Average selling prices in our fuel oil and refined fuels segment increased approximately 46% as a result of higher fuel oil commodity prices, coupled with the

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decreased emphasis on lower priced diesel and gasoline businesses. The average posted price of fuel oil during the first quarter of fiscal 2006 increased approximately 30% compared to the average posted prices in the prior year quarter.

Revenues for the first quarter of fiscal 2006 were favorably impacted by a 68.7% increase in our natural gas and electricity marketing segment, which increased to $37.9 million from $22.5 million in the prior year quarter, primarily as a result of a rise in electricity volumes coupled with increases in average selling prices for natural gas and electricity in line with higher commodity prices. Revenues in our HVAC segment declined 2.9%, to $31.2 million during the first quarter of fiscal 2006 compared to $32.2 million in the prior year quarter.

Cost of Products Sold

(Dollars in thousands)				Three Months Ended								Increase (Decrease)				Percent Increase (Decrease)
				December 24, 2005				December 25, 2004
Cost of products sold
Propane				$	190,011			$	147,009			$	43,002				29.3	%
Fuel oil and refined fuels					85,712				91,798				(6,086	)			(6.6	%)
Natural gas and electricity					33,968				20,498				13,470				65.7	%
HVAC					11,836				12,780				(944	)			(7.4	%)
All other					1,358				1,355				3				0.2	%
Total cost of products sold				$	322,885			$	273,440			$	49,445				18.1	%
As a percent of total revenues					66.2	%			64.5	%

The cost of products sold reported in the condensed consolidated statements of operations represents the weighted average unit cost of propane and fuel oil sold, as well as the cost of natural gas and electricity, including transportation costs to deliver product from our supply points to storage or to our customer service centers. Cost of products sold also includes the cost of appliances and related parts sold or installed by our customer service centers computed on a basis that approximates the average cost of the products. Cost of products sold is reported exclusive of any depreciation and amortization; these amounts are reported separately within the condensed consolidated statements of operations.

Cost of products sold increased $49.4 million, or 18.1%, to $322.9 million for the three months ended December 24, 2005 compared to $273.4 million in the prior year quarter. The increase results primarily from higher commodity prices for propane and fuel oil, offset to an extent by the lower sales volumes described above. Cost of products sold associated with the distribution of propane and related activities of $190.0 million increased $43.0 million, or 29.3%, compared to the prior year quarter. Higher propane prices resulted in a $31.3 million increase in cost of products sold during the first quarter of fiscal 2006 compared to the prior year quarter, partially offset by decreased propane volumes which had an impact of $8.0 million. Higher wholesale and risk management activities, noted above, increased cost of products sold by $19.5 million compared to the prior year quarter.

Cost of products sold associated with our fuel oil and refined fuels segment of $85.7 million decreased $6.1 million, or 6.6%, compared to the prior year quarter. Lower sales volumes resulted in a $30.8 million decrease in cost of products sold during the first quarter of fiscal 2006 compared to the prior year quarter, partially offset by higher commodity prices which had an impact of $24.9 million compared to the prior year quarter. Cost of products sold as a percentage of revenues in our fuel oil and refined fuels segment decreased from 84.8% during the first quarter of fiscal 2005 to 81.4% in the first quarter of fiscal 2006 primarily as a result of the elimination of the fuel oil Ceiling Program which had the effect of restricting fuel oil margin opportunities in fiscal 2005, as well as the aforementioned improvement in product mix from the exit of certain diesel and gasoline businesses.

In addition, the increase in revenues attributable to our natural gas and electricity segment had a $13.5 million impact on cost of products sold for the three months ended December 24, 2005 compared to the prior year quarter. Cost of products sold in our HVAC segment declined 7.4% as a result of lower revenues.

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For the quarter ended December 24, 2005, cost of products sold represented 66.2% of revenues compared to 64.5% in the prior year quarter. This increase results primarily from higher costs of products sold in our propane segment with the increased wholesale and risk management activities, as well as continued impact of the product mix with increased natural gas and electricity activities during the first quarter of fiscal 2006.

Operating Expenses

(Dollars in thousands)				Three Months Ended
				December 24, 2005				December 25, 2004				Decrease				Percent Decrease
Operating expenses				$	93,219			$	95,666			$	(2,447	)			(2.6	%)
As a percent of total revenues					19.1	%			22.6	%

All costs of operating our retail distribution and appliance sales and service operations are reported within operating expenses in the consolidated statements of operations. These operating expenses include the compensation and benefits of field and direct operating support personnel, costs of operating and maintaining our vehicle fleet, overhead and other costs of our purchasing, training and safety departments and other direct and indirect costs of our customer service centers. Changes in the fair value of derivative instruments that are not designated as hedges are recorded in current period earnings within operating expenses.

Operating expenses of $93.2 million for the three months ended December 24, 2005 decreased $2.4 million, or 2.6%, compared to $95.7 million in the prior year quarter. Operating expenses in the fiscal 2006 first quarter include a $7.0 million unrealized (non-cash) gain representing the net change in fair values of derivative instruments during the period, compared to a $2.5 million unrealized gain in the prior year quarter resulting in a $4.5 million decrease in operating expenses for the quarter ended December 24, 2005 compared to the prior year quarter (see Item 3 in this Quarterly Report for information on our policies regarding the accounting for derivative instruments). Offsetting the impact of the mark-to-market adjustments, operating expenses increased $2.1 million as a result of $2.6 million higher variable compensation in line with improved earnings; a $1.0 million increase in costs to operate and maintain our fleet, primarily due to higher fuel costs; and $0.6 million increased bad debt expense as a result of higher energy costs; offset to an extent by efficiencies achieved and cost savings realized from our field realignment, particularly in the area of compensation and benefit related expenses from lower headcount.

General and Administrative Expenses

(Dollars in thousands)				Three Months Ended
				December 24, 2005				December 25, 2004				Increase				Percent Increase
General and administrative expenses				$	14,216			$	10,968			$	3,248				29.6	%
As a percent of total revenues					2.9	%			2.6	%

All costs of our back office support functions, including compensation and benefits for executives and other support functions, as well as other costs and expenses to maintain finance and accounting, treasury, legal, human resources, corporate development and the information systems functions are reported within general and administrative expenses in the consolidated statements of operations.

General and administrative expenses of $14.2 million for the three months ended December 24, 2005 were $3.2 million, or 29.6%, higher compared to $11.0 million during first quarter of fiscal 2005. The increase was primarily attributable to increased variable compensation in line with improved earnings, as well as higher professional service fees in connection with assistance with certain business initiatives, including the field realignment.

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Depreciation and Amortization

(Dollars in thousands)				Three Months Ended
				December 24, 2005				December 25, 2004				Decrease				Percent Decrease
Depreciation and amortization				$	8,211			$	9,119			$	(908	)			(10.0	%)
As a percent of total revenues					1.7	%			2.2	%

Depreciation and amortization expense for the three months ended December 24, 2005 were $0.9 million lower than the first quarter of the prior fiscal year, representing a 10.0% decrease, as a result of lower depreciation from asset retirements.

Interest Expense, net

(Dollars in thousands)				Three Months Ended
				December 24, 2005				December 25, 2004				Increase				Percent Increase
Interest expense, net				$	10,567			$	9,863			$	704				7.1	%
As a percent of total revenues					2.2	%			2.3	%

Net interest expense increased $0.7 million, or 7.1%, to $10.6 million for the three months ended December 24, 2005, compared to $9.9 million in the prior year quarter. The increase results primarily from higher amounts outstanding under our working capital facility to fund increased working capital requirements from higher commodity prices, offset to an extent by lower average interest rates on long-term borrowings.

Net Income and EBITDA. Net income for the three months ended December 24, 2005 amounted to $38.2 million, an increase of $13.3 million, or 53.4%, compared to the prior year quarter of $24.9 million. EBITDA increased $13.1 million, or 29.8%, to $57.1 million for the three months ended December 24, 2005 compared to $44.0 million in the prior year quarter. Despite lower volumes in propane and refined fuels, our net income and EBITDA improved 53.4% and 29.8%, respectively, as a result of a conscious effort to focus on higher margin propane and refined fuels customers, cost savings attributable to the initial steps taken in our field realignment and the impact on fuel oil margins from the elimination of the Ceiling Program.

EBITDA represents net income before deducting interest expense, income taxes, depreciation and amortization. Our management uses EBITDA as a measure of liquidity and we are including it because we believe that it provides our investors and industry analysts with additional information to evaluate our ability to meet our debt service obligations and to pay our quarterly distributions to holders of our Common Units. Moreover, our Revolving Credit Agreement requires us to use EBITDA as a component in calculating our leverage and interest coverage ratios. EBITDA is not a recognized term under GAAP and should not be considered as an alternative to net income or net cash provided by operating activities determined in accordance with GAAP. Because EBITDA as determined by us excludes some, but not all, items that affect net income, it may not be comparable to EBITDA or similarly titled measures used by other companies. The following table sets forth (i) our calculation of EBITDA and (ii) a reconciliation of EBITDA, as so calculated, to our net cash used in operating activities:

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(Dollars in thousands)				Three Months Ended
				December 24, 2005				December 25, 2004
Net income				$	38,215			$	24,901
Add:
Provision for income taxes					150				89
Interest expense, net					10,567				9,863
Depreciation and amortization					8,211				9,119
EBITDA					57,143				43,972
Add (subtract):
Provision for income taxes					(150	)			(89	)
Interest expense, net					(10,567	)			(9,863	)
Gain on disposal of property, plant and equipment, net					(44	)			(207	)
Changes in working capital and other assets and liabilities					(55,314	)			(63,440	)
Net cash (used in)/provided by
Operating activities				$	(8,932	)		$	(29,627	)
Investing activities				$	(5,938	)		$	(7,909	)
Financing activities				$	17,088			$	(96	)

Liquidity and Capital Resources

Analysis of Cash Flows

Operating Activities. Due to the seasonal nature of the propane and fuel oil businesses, cash flows from operating activities are greater during the winter and spring seasons, our second and third fiscal quarters, as customers pay for products purchased during the heating season. Seasonal working capital requirements typically increase during the first fiscal quarter in order to fund inventory purchases and carrying receivables. For the three months ended December 24, 2005, net cash used in operating activities was $8.9 million compared to net cash used in operating activities of $29.6 million for the first three months of the prior year. The $20.7 million improvement in operating cash flows was attributable to $12.8 million increased earnings, after adjusting for non-cash items in both periods (depreciation, amortization and gains on disposal of assets), coupled with a $7.9 million decreased investment in working capital in comparison to the first quarter of the prior year, particularly in increased accounts payable balances offset by higher accounts receivable.

Investing Activities. Net cash used in investing activities of $5.9 million for the three months ended December 24, 2005 consists of capital expenditures of $6.2 million (including $1.8 million for maintenance expenditures and $4.4 million to support the growth of operations), partially offset by the net proceeds from the sale of property, plant and equipment of $0.3 million. Net cash used in investing activities of $7.9 million for the three months ended December 25, 2004 consisted of capital expenditures of $8.7 million (including $1.5 million for maintenance expenditures and $7.2 million to support growth of operations), partially offset by the net proceeds from the sale of property, plant and equipment of $0.8 million.

Financing Activities. Net cash provided by financing activities for the three months ended December 24, 2005 of $17.1 million reflects borrowings of $36.3 million under our Revolving Credit Agreement in order to fund increased working capital needs during the heating season, offset by quarterly distributions to Common Unitholders and the General Partner at a rate $0.6125 per Common Unit in respect of the fourth quarter of fiscal 2005 of $19.2 million. Net cash used in financing activities for the three months ended December 25, 2004 of $0.1 million reflects the net result of borrowings of $20.2 million under our Revolving Credit Agreement in order to fund working capital needs in the beginning of the heating season, offset by our quarterly distribution of $0.6125 per Common Unit amounting to $19.1 million and $1.2 million in fees associated with entering into the Third Amended and Restated Credit Agreement in October 2004.

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Summary of Long-Term Debt Obligations and Revolving Credit Lines

Our long-term borrowings and revolving credit lines consist of $425.0 million in 6.875% senior notes due December 2013 (the ‘‘2003 Senior Notes’’) and a Revolving Credit Agreement at the Operating Partnership level which provides a five-year $125.0 million term loan due March 31, 2010 (the ‘‘Term Loan’’) and a separate working capital facility. The 2003 Senior Notes mature on December 15, 2013 and require semi-annual interest payments that began on June 15, 2004. We are permitted to redeem some or all of the 2003 Senior Notes any time on or after December 15, 2008, at redemption prices specified in the indenture governing the 2003 Senior Notes. In addition, embedded within the 2003 Senior Notes is a change of control provision that would require us to offer to repurchase the notes at 101% of the principal amount repurchased, if the holders of the notes elected to exercise the right of repurchase.

On August 26, 2005, we completed the second amendment to the Revolving Credit Agreement pursuant to which the lenders (i) eliminated a stand-alone $75.0 million letter of credit facility and combined that credit with the existing revolving working capital facility; (ii) increased the revolving working capital facility by an additional $25.0 million, thereby raising the amount of the working capital facility from $75.0 million to $175.0 million (including the $75.0 million from the former stand-alone letter of credit facility); (iii) extended the revolving credit facility’s expiration date to match the March 31, 2010 maturity date of the Term Loan; and, (iv) amended certain other terms to effect the foregoing. Borrowings under the Revolving Credit Agreement, including the Term Loan, bear interest at a rate based upon either LIBOR or Wachovia National Bank's prime rate, plus, in each case, the applicable margin or the Federal Funds rate plus 1/2 of 1%. An annual facility fee ranging from 0.375% to 0.50%, based upon certain financial tests, is payable quarterly whether or not borrowings occur.

As of December 24, 2005, there was $63.0 million outstanding under the working capital facility of the Revolving Credit Agreement that was used to fund working capital requirements. While working capital requirements have increased as a result of the sustained period of significantly higher commodity prices for both propane and fuel oil, we believe that our working capital facility provides sufficient borrowing capacity to meet the increased seasonal needs. Cash flow from operations is typically greater during our second and third fiscal quarters as customers pay for products purchased during the heating season. Accordingly, we expect to significantly reduce the amounts outstanding under the working capital facility of the Revolving Credit Agreement by the end of our third quarter ending June 2006.

The Revolving Credit Agreement and the 2003 Senior Notes both contain various restrictive and affirmative covenants applicable to our Operating Partnership and us, respectively; including (i) restrictions on the incurrence of additional indebtedness, and (ii) restrictions on certain liens, investments, guarantees, loans, advances, payments, mergers, consolidations, distributions, sales of assets and other transactions. Under the Revolving Credit Agreement, the Operating Partnership is required to maintain a leverage ratio (the ratio of Operating Partnership debt to EBITDA) of less than 4.0 to 1. In addition, the Operating Partnership is required to maintain an interest coverage ratio (the ratio of EBITDA to consolidated interest expense) of greater than 2.5 to 1 on a consolidated basis. We were in compliance with all covenants and terms of all of our debt agreements as of December 24, 2005.

In connection with the Term Loan, our Operating Partnership also entered into an interest rate swap contract with a notional amount of $125.0 million with the issuing lender. Effective March 31, 2005 through March 31, 2010, our Operating Partnership will pay a fixed interest rate of 4.66% to the issuing lender on notional principal amount of $125.0 million, effectively fixing the LIBOR portion of the interest rate at 4.66%. In return, the issuing lender will pay to our Operating Partnership a floating rate, namely LIBOR, on the same notional principal amount. The applicable margin above LIBOR, as defined in the Revolving Credit Agreement, is not included in, and will be paid in addition to this fixed interest rate of 4.66%.

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Partnership Distributions

We will make distributions in an amount equal to all of our Available Cash, as defined in the Second Amended and Restated Partnership Agreement, approximately 45 days after the end of each fiscal quarter to holders of record on the applicable record dates. The Board of Supervisors reviews the level of Available Cash on a quarterly basis based upon information provided by management. On January 19, 2006, we declared a quarterly distribution of $0.6125 per Common Unit, or $2.45 on an annualized basis, in respect of the first quarter of fiscal 2006 payable on February 7, 2006 to holders of record on January 31, 2006.

Quarterly distributions include Incentive Distribution Rights (‘‘IDRs’’) payable to our General Partner to the extent the quarterly distribution exceeds $0.55 per Common Unit. The IDRs represent an incentive for the General Partner (which is owned by management of the Partnership) to increase the distributions to Common Unitholders in excess of $0.55 per Common Unit. With regard to the first $0.55 of the Common Unit distribution, 98.46% of the Available Cash is distributed to the Common Unitholders and 1.54% is distributed to the General Partner. With regard to the balance of the Common Unit distributions paid, 85% of the Available Cash is distributed to the Common Unitholders and 15% is distributed to the General Partner.

Debt Obligations and Other Commitments

Short-term and long-term debt obligations and future minimum rental commitments under noncancelable operating lease agreements are due as follows:

(Dollars in thousands)				Remainder of Fiscal 2006				Fiscal 2007				Fiscal 2008				Fiscal 2009				Fiscal 2010 and thereafter				Total
Short-term and long-term debt				$	63,475			$	—			$	—			$	—			$	548,128			$	611,603
Operating leases					18,399				17,147				11,759				7,944				10,033				65,282
Total debt obligations and lease commitments				$	81,874			$	17,147			$	11,759			$	7,944			$	558,161			$	676,885

We have a noncontributory, cash balance format, defined benefit pension plan for eligible participants in existence on January 1, 2000, which was frozen to new participants effective January 1, 2003. At December 24, 2005, we had accrued pension obligations of $41.5 million. We also provide postretirement health care and life insurance benefits for certain retired employees under a plan that was also frozen to new participants effective January 1, 2000. At December 24, 2005, we had accrued retiree health and life benefits of $33.0 million. We are self-insured for general, product, workers’ compensation and automobile liabilities up to predetermined thresholds above which third party insurance applies. At December 24, 2005, we had accrued insurance liabilities of $38.4 million, net of an $8.0 million asset related to the amount of the liability expected to be covered by insurance carriers. Additionally, we have standby letters of credit in the aggregate amount of $53.3 million, in support of our casualty insurance coverage and certain lease obligations, which expire periodically through October 25, 2006.

Additionally, we have residual value guarantees associated with certain of our operating leases, related primarily to transportation equipment, with remaining lease periods scheduled to expire periodically through fiscal 2013. Upon completion of the lease period, we guarantee that the fair value of the equipment will equal or exceed the guaranteed amount, or we will pay the difference. Although the equipment’s fair value at the end of its lease term has historically exceeded the guaranteed amounts, the maximum potential amount of aggregate future payments we could be required to make under these leasing arrangements, assuming the equipment is deemed worthless at the end of the lease term, is approximately $18.0 million. Of this amount, the fair value of residual value guarantees for operating leases entered into after December 31, 2002 was $6.3 million as of both December 24, 2005 and September 24, 2005, which is reflected in other liabilities, with a corresponding amount included within other assets in the accompanying condensed consolidated balance sheets.

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Recently Issued Accounting Standards

In March 2005, the Financial Accounting Standards Board (the ‘‘FASB’’) issued FASB Interpretation No. 47, ‘‘Accounting for Conditional Asset Retirement Obligations’’ (‘‘FIN 47’’). FIN 47 clarifies the term "conditional asset retirement obligation" as a legal obligation to retire an asset when the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. FIN 47 also requires an entity to recognize a liability for the fair value of the conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. FIN 47 is effective no later than the end of our fiscal year ending September 30, 2006. We are currently evaluating the provisions of FIN 47 and currently believe that adoption will not have a material effect on our financial position, results of operations or cash flows.

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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements (‘‘Forward-Looking Statements’’) as defined in the Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act of 1933, as amended, relating to future business expectations and predictions and financial condition and results of operations of Suburban Propane Partners, L.P. (the ‘‘Partnership’’). Some of these statements can be identified by the use of forward-looking terminology such as ‘‘prospects,’’ ‘‘outlook,’’ ‘‘believes,’’ ‘‘estimates,’’ ‘‘intends,’’ ‘‘may,’’ ‘‘will,’’ ‘‘should,’’ ‘‘anticipates,’’ ‘‘expects’’ or ‘‘plans’’ or the negative or other variation of these or similar words, or by discussion of trends and conditions, strategies or risks and uncertainties. These Forward-Looking Statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those discussed or implied in such Forward-Looking Statements (statements contained in this Quarterly Report identifying such risks and uncertainties are referred to as ‘‘Cautionary Statements’’). The risks and uncertainties and their impact on the Partnership’s results include, but are not limited to, the following risks:

•	The impact of weather conditions on the demand for propane, fuel oil and other refined fuels, natural gas and electricity;

•	Fluctuations in the unit cost of propane, fuel oil and other refined fuels and natural gas, and the impact of price increases on customer conservation;

•	The ability of the Partnership to compete with other suppliers of propane, fuel oil and other energy sources;

•	The impact on the price and supply of propane, fuel oil and other refined fuels from the political, military or economic instability of the oil producing nations, global terrorism and other general economic conditions;

•	The ability of the Partnership to continue to realize, or to realize fully, within the expected time frame, the expected cost savings and synergies from the Agway Acquisition (as defined below);

•	The ability of the Partnership to acquire and maintain reliable transportation for its propane, fuel oil and other refined fuels;

•	The ability of the Partnership to retain customers;

•	The impact of energy efficiency and technology advances on the demand for propane and fuel oil;

•	The ability of management to continue to control expenses including the results of our recent field realignment initiative;

•	The impact of changes in applicable statutes and government regulations, or their interpretations, including those relating to the environment and global warming and other regulatory developments on the Partnership’s business;

•	The impact of legal proceedings on the Partnership’s business;

•	The Partnership’s ability to implement its expansion strategy into new business lines and sectors; and

•	The Partnership’s ability to integrate acquired businesses successfully.

Some of these Forward-Looking Statements are discussed in more detail in ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ in this Quarterly Report. On different occasions, the Partnership or its representatives have made or may make Forward-Looking Statements in other filings with the Securities and Exchange Commission (‘‘SEC’’), press releases or oral statements made by or with the approval of one of the Partnership’s authorized executive officers. Readers are cautioned not to place undue reliance on Forward-Looking Statements, which reflect management’s view only as of the date made. The Partnership undertakes no obligation

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to update any Forward-Looking Statement or Cautionary Statement. All subsequent written and oral Forward-Looking Statements attributable to the Partnership or persons acting on its behalf are expressly qualified in their entirety by the Cautionary Statements in this Quarterly Report and in future SEC reports.

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ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of December 24, 2005, we were a party to exchange-traded futures and option contracts, forward contracts and in certain instances, over-the-counter options (collectively ‘‘derivative instruments’’) to manage the price risk associated with future purchases of the commodities used in our operations, principally propane and fuel oil. Futures and forward contracts require that we sell or acquire propane or fuel oil at a fixed price at fixed future dates. An option contract allows, but does not require, its holder to buy or sell propane or fuel oil at a specified price during a specified time period. However, the writer of an option contract must fulfill the obligation of the option contract, should the holder choose to exercise the option. At expiration, the contracts are settled by the delivery of the product to the respective party or are settled by the payment of a net amount equal to the difference between the then current price and the fixed contract price. The contracts are entered into in anticipation of market movements and to manage and hedge exposure to fluctuating prices of propane and fuel oil, as well as to help ensure the availability of product during periods of high demand.

During fiscal 2005, approximately 70% of our fuel oil volumes were sold to individual customers under a Ceiling Program which was an agreement pre-establishing a maximum price per gallon over a twelve-month period. While our strategy was to enter into derivative instruments in the form of futures and options traded on the NYMEX covering a majority of the fuel oil we expected to sell to customers under the Ceiling Program in an effort to protect the margins under the program, we evaluated the costs of such hedge protection and elected not to hedge deliveries in February through April of 2005 (impacting our second and third fiscal quarters of fiscal 2005) under this program. After evaluating the costs to adequately hedge the Ceiling Program in the current commodity price environment, particularly for fuel oil, we decided to discontinue offering the Ceiling Program after the fiscal 2005 heating season. Accordingly, we have not offered the Ceiling Program for the fiscal 2006 heating season.

Market Risk

We are subject to commodity price risk to the extent that propane or fuel oil market prices deviate from fixed contract settlement amounts. Futures traded with brokers of the NYMEX require daily cash settlements in margin accounts. Forward and option contracts are generally settled at the expiration of the contract term either by physical delivery or through a net settlement mechanism. Market risks associated with the trading of futures, options and forward contracts are monitored daily for compliance with our Hedging and Risk Management Policy which includes volume limits for open positions. Open inventory positions are reviewed and managed daily as to exposures to changing market prices.

Credit Risk

Futures and fuel oil options are guaranteed by the NYMEX and, as a result, have minimal credit risk. We are subject to credit risk with forward and propane option contracts to the extent the counterparties do not perform. We evaluate the financial condition of each counterparty with which we conduct business and establish credit limits to reduce exposure to credit risk of non-performance.

Interest Rate Risk

A portion of our long-term borrowings bear interest at a variable rate based upon either LIBOR or Wachovia National Bank's prime rate, plus an applicable margin depending on the level of our total leverage. Therefore, we are subject to interest rate risk on the variable component of the interest rate. We manage our interest rate risk by entering into interest rate swap agreements. On March 31, 2005, we entered into a $125,000 interest rate swap contract in conjunction with the new Term Loan facility under the Revolving Credit Agreement. The interest rate swap is being accounted for under Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS Nos. 137, 138 and 149 ("SFAS 133") and has been designated as a cash flow hedge. Changes in the fair value of the interest rate swap are

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recognized in other comprehensive income until the hedged item is recognized in earnings. At December 24, 2005, the fair value of the interest rate swap was $0.4 million and is included within other assets.

Derivative Instruments and Hedging Activities

We account for derivative instruments in accordance with the provisions of SFAS 133. All derivative instruments are reported on the balance sheet, within other current assets or other current liabilities, at their fair values. Fair values for forward contracts and futures are derived from quoted market prices for similar instruments traded on the NYMEX. On the date that futures, forward and option contracts are entered into, we make a determination as to whether the derivative instrument qualifies for designation as a hedge. Changes in the fair value of derivative instruments are recorded each period in current period earnings or other comprehensive income (loss) (‘‘OCI’’), depending on whether a derivative instrument is designated as a hedge and, if so, the type of hedge. For derivative instruments designated as cash flow hedges, we formally assess, both at the hedge contract’s inception and on an ongoing basis, whether the hedge contract is highly effective in offsetting changes in cash flows of hedged items. Changes in the fair value of derivative instruments designated as cash flow hedges are reported in OCI to the extent effective and reclassified into cost of products sold during the same period in which the hedged item affects earnings. The mark-to-market gains or losses on ineffective portions of hedges are recognized in operating expenses immediately.

Changes in the fair value of derivative instruments that are not designated as hedges are recorded in current period earnings within operating expenses and reclassified to cost of products sold once realized. A portion of our option contracts are not classified as hedges and, as such, changes in the fair value of these derivative instruments are recognized within operating expenses as they occur. The value of certain option contracts that do qualify as hedges and are designated as cash flow hedges under SFAS 133 have two components of value: time value and intrinsic value. The intrinsic value is the value by which the option is in the money (i.e., the amount by which the value of the commodity exceeds the exercise or ‘‘strike’’ price of the option). The remaining amount of option value is attributable to time value. We do not include the time value of option contracts in our assessment of hedge effectiveness and, therefore, record changes in the time value component of the options currently in earnings.

At December 24, 2005, the fair value of derivative instruments described above resulted in derivative assets (unrealized gains) of $0.3 million included within prepaid expenses and other current assets and derivative liabilities (unrealized losses) of $1.2 million included within other current liabilities. For the three months ended December 24, 2005, operating expenses include unrealized (non-cash) gains in the amount of $7.0 million compared to unrealized gains in the amount of $2.5 million for the three months ended December 25, 2004 attributable to the change in the fair value of derivative instruments not designated as hedges. At December 24, 2005, unrealized gains on derivative instruments designated as cash flow hedges in the amount of $0.1 million were included in OCI and are expected to be recognized in earnings during the next 12 months as the hedged transactions occur. However, due to the volatility of the commodities market, the corresponding value in OCI is subject to change prior to its impact on earnings.

Sensitivity Analysis

In an effort to estimate our exposure to unfavorable market price changes in propane or fuel oil, a sensitivity analysis of open positions as of December 24, 2005 was performed. Based on this analysis, a hypothetical 10% adverse change in market prices for each of the future months for which a future, forward and/or option contract exists indicates either a reduction in potential future gains or potential losses in future earnings of $4.0 million and $6.2 million as of December 24, 2005 and December 25, 2004, respectively. See also Item 7A of our Annual Report on Form 10-K for the fiscal year ended September 24, 2005.

The above hypothetical change does not reflect the worst case scenario. Actual results may be significantly different depending on market conditions and the composition of the open position portfolio at any given point in time.

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ITEM 4.    CONTROLS AND PROCEDURES

(a) The Partnership maintains disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934) that are designed to provide reasonable assurance that information required to be disclosed in the Partnership’s filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to the Partnership’s management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

On January 30, 2006, before filing this Quarterly Report, the Partnership completed an evaluation under the supervision and with participation of the Partnership’s management, including the Partnership’s principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Partnership’s disclosure controls and procedures as of December 24, 2005. Based on this evaluation, the Partnership’s principal executive officer and principal financial officer have concluded that as of December 24, 2005, such disclosure controls and procedures were effective at the reasonable assurance level.

(b) There have not been any changes in the Partnership’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934) during the quarter ended December 24, 2005 that have materially affected or are reasonably likely to materially affect its internal control over financial reporting.

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PART II

ITEM 6. EXHIBITS

(a)	Exhibits

	31.1	Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	31.2	Certification of the Vice President and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	32.1	Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	32.2	Certification of the Vice President and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

				Suburban Propane Partners, L.P.
February 2, 2006 Date				/s/ ROBERT M. PLANTE Robert M. Plante Vice President and Chief Financial Officer
February 2, 2006 Date				/s/ MICHAEL A. STIVALA Michael A. Stivala Controller and Chief Accounting Officer

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