Suburban Propane Partners, L.P.

240 Route 10 West
Whippany, New Jersey 07981
U.S.A.
(973) 887-5300
(888) 752-9024
Fax: (973) 515-5994
Web site: http://www.suburbanpropane.com

Public Company
Incorporated: 1928 as Suburban Propane Gas Co.
Employees: 3,217
Sales: $667.3 million (fiscal 1998)
Stock Exchanges: New York
Ticker Symbol: SPH
NAIC: 454312 Liquefied Petroleum Gas (Bottled Gas) Dealers

Suburban Propane Partners, L.P., a publicly traded limited partnership, is the third largest marketer of propane fuel in the United States serving more than 700,000 retail and wholesale customers in over 40 states. Found in the extraction of both crude oil and natural gas, propane is a gas liquefied under pressure and distributed in tanks and cylinders for reconversion to a gas under normal air pressure. Suburban Propane also sells propane-related appliances and services.

Independent Company: 1928–82

The company was founded in 1928 as Suburban Propane Gas Co. by Mark Anton because the New Jersey home where he lived was beyond the range of gas lines. Anton found that he could obtain propane from a nearby Phillips Petroleum Co. plant that considered the gas a useless byproduct of the oil-refining process. He marketed propane to other New Jersey homeowners who wanted gas for cooking and heating. Anton established an office in Belleville, a gas well in Boonton, and plants in Belvidere, Farmingdale, and Livingston. At the end of 1945 the company went public as Suburban Propane Gas Co., the first publicly owned company whose sole purpose was to distribute propane. It purchased Phillips’ 13 liquefied petroleum gas properties in the United States. The following year it had revenues of $5.5 million and earnings of $600,000 on sales of 14 million gallons of propane.

But Anton had more ambitious plans. He wanted to organize vertically, producing the propane Suburban sold and manufacturing the tanks that held the liquid plus an array of gas-burning appliances. Accordingly, Suburban Propane Gas acquired a manufacturing plant in Tennessee that produced gas heaters, another in Pennsylvania that made gas ranges, and a third in Charlotte, North Carolina, that manufactured propane tanks. During the 1950s the company purchased a small gas field near Pearsall, Texas, and established a plant there to produce butane, propane, and natural gasoline. Revenues reached $47.1 million in 1960.

Anton retired in 1963 and was succeeded as chief executive officer of Suburban Propane Gas by his son, Mark J. Anton. The company had 129 sales, service, and distribution stations in 19 states, all but one of them east of the Mississippi. Its subsidiaries now included Frio-Tex Oil & Gas Corp., controlling about 67 natural gas wells in Texas and selling LP gases (including butane and a mixture of butane and propane), and Plateau, Inc., producing and distributing petroleum products in New Mexico. That year, however, the company sold its unprofitable manufacturer of gas ranges. Suburban Propane Gas was, in 1965, the world’s largest independent retail distributor of liquid petroleum gases, marketing more than ten percent of this product in the United States. It was supplying bottled gas to more than 500,000 homes in 26 states and thousands of industrial plants and commercial and institutional enterprises.

By 1968 Suburban Propane Gas’s non-propane activities were accounting for about one-quarter of the company’s revenues and earnings. The purchase in 1967 of additional properties in Crockett County, Texas, brought the number of its Frio-Tex natural-gas wells to 175. A pipeline was delivering propane and butane to two plants—one wholly owned, the other partly owned, by Suburban—for conversion to liquids. Suburban’s manufacturing subsidiaries were producing gas-fuel appliances as well as propane tanks. The company was also producing miniaturized “Dyna-Trail” central heating systems for the recreational vehicle industry. Plateau was operating an oil refinery in New Mexico and marketing some of the production to more than 70 gasoline stations under the Plateau brand.

Suburban’s anchor gas distribution business was now operating in 28 states. Service to industries and farms was growing more rapidly than home use. For farmers, LP gases were fueling grain dryers, cotton gins, tobacco curers, weed burners, tractor engines, and poultry brooders. Industries were using propane to power forklift trucks, for heating at construction sites, for plaster drying, and to thaw coal and iron shipments. Suburban was meeting most of its gas needs from more than a dozen suppliers, including many of the major oil companies. Its revenues reached a record $96.6 million, and net income a record $5.5 million, in fiscal 1970 (the year ended September 30, 1970).

Suburban Propane Gas’s revenues grew every year in the 1970s and its operating income every year except fiscal 1975. With the purchase in 1971 of Vangas, Inc., a California-based propane marketer active in seven western states, the company was providing propane to 600,000 customers in 32 states. It also had 268 gas wells in operation, held about 40 percent of the market for recreational vehicle heaters, and owned nine cable television (CATV) franchises serving 12,000 customers: a business it entered in 1970 and then divested at a profit by late 1974. The company, which disposed of the propane tank plant about the beginning of the decade, also again began producing gas cooking ranges, but only for recreational vehicles, in 1971. It also had begun making combination heater-air conditioners for space use in buildings. But propane distribution still accounted for 72 percent of revenues in fiscal 1972.

Suburban Propane Gas acquired a second oil refinery in Utah in 1975. The Iranian revolution of 1978 created a world oil shortage and a consequent run-up in oil prices that enabled the profits from Suburban’s petroleum refining and marketing division to surge from the 171 retail service stations it now owned or controlled in five western states. Conversely, high gasoline prices depressed the recreational vehicle industry, and in 1979 Suburban wrote off its inventory of RV propane heaters. The manufacturing division turned its attention to a line of solid-fuel furnaces and heaters for the home and a fireplace insert with thermostatic controls. The exploration and production division purchased a Colorado oil and gas drilling and well service firm in 1980 and entered the onshore deep drilling business in 1981 with the purchase of a Texas company. In fiscal 1981 sales reached a record $850.9 million.

Downsized Division: 1982–95

A Canadian businessman named Samuel Belzberg and two of his brothers attempted to take over Suburban Propane Gas in late 1982, raising their holdings in the company to about 12 percent of the stock. Anton and six other top corporate executives, in collaboration with the Bass family of Fort Worth, Texas, then offered $45 a share, or $238.5 million, for the company, which would be 80 percent owned by the Basses and 20 percent by the executives. In January 1983, however, Suburban was purchased by National Distillers and Chemical Corporation for about $275 million.

Now simply called Suburban Propane, the division stopped making heaters and also left the gasoline service station business. The largest U.S. retail marketer of LP gases, Suburban Propane was distributing the product in 44 states in 1986 through company-owned service centers and offices. Sales of 744 million gallons that year were partly through about 500 bulk storage stations. The company also owned a refrigerated storage facility in California and underground storage facilities in Mississippi and Texas. Through its exploration subsidiary, Suburban had partial ownership of about 600 oil and natural gas wells. It was also still engaged in contract drilling in Texas and well servicing in Colorado, owned and operated a gas processing plant in Texas, and operated and held partial ownership in other gas processing plants in Texas and Oklahoma.

National Distillers and Chemical Corporation changed its name to Quantum Chemical Corporation in 1987. Between 1984 and 1989 the Suburban Propane unit purchased smaller companies distributing a total of 400 million gallons of propane a year. Propane marketing sales rose from $571.6 million in fiscal 1985 to $677.7 million in fiscal 1988, when $113 million was registered in operating profit. The following years were less lucrative, however. In 1988 Suburban sold all its interests in oil and gas wells, gas processing plants, and contract drilling. That year it lost its position as the nation’s top-ranking retail LP gas distributor and no longer was selling any LP gas but propane. In fiscal 1992 Suburban Propane had $641.6 million in revenues and operating profit of $51.2 million.

Public Partnership: 1996–99

Hanson PLC, a British-based conglomerate, acquired Quantum Chemical in 1993. Hanson concentrated on mending Quantum’s finances and its troubled petrochemical sector, the chief source of its business. By the end of 1995 Suburban had fallen to third place among retail propane distributors. It had sales of $633.6 million in fiscal 1995 (compared to $677.8 million in fiscal 1994) and net income of $30.2 million.

Company Perspectives:

It is the mission of Suburban Propane to: lead the industry in customer satisfaction by offering the highest level of total value; treat all employees fairly and create a work environment that offers challenge, opportunity and rewards; maintain the highest level of safety standards for the well-being of our employees, customers and communities. Accomplishing our Mission will result in profitable growth and provide a fair return to our shareholders.

In December 1995 Hanson announced it would sell a 62 percent interest in Suburban Propane through an initial public offering, retaining the other 38 percent. The Hanson subsidiary was first restructured as Suburban Propane Partners, L.P., a master limited partnership. A total of 18.75 million units were then sold at the end of February 1996 at $20.50 per unit, with proceedings to the partnership of $359.6 million. This sum was earmarked for intercompany payables of Quantum Chemical. The partnership’s long-term debt at the end of 1995 (adjusted to reflect the initial public offering) was $425 million.

A January 1996 Wall Street Journal column by Linda Sandier questioned whether the new partnership would be a wise investment. One securities analyst called the propane market a “cutthroat business” in which big companies such as Suburban were unable to raise prices for fear of being undercut by countless small “mop-and-pop” firms. With the total propane market stagnant, any gain in market share apparently would have to come from acquisitions. Suburban Propane had a $300 million bank line for this purpose, according to Mark Alexander, a Hanson executive who was appointed chief executive of the partnership. It was serving more than 700,000 customers in 41 states at this time but held less than seven percent of the U.S. market for propane.

During fiscal 1996 Suburban Propane Partners acquired 17 propane distributors at a total cost of $31.7 million, with the emphasis on operations active on the East and West Coasts and around the Great Lakes. “We’re in every auction process,” Alexander told Ellen Simon of the Newark Star-Ledger in December 1996. “Whenever there is one, we will bid. We’ll only bid rational prices. So we don’t win many. If the competition wants to overpay, so be it. We’ll be there to pick up the pieces.” Alexander went on to say, “This company should double in size in five years. In ten years, it should be a full-service organization.” Suburban purchased ten more propane distributors in fiscal 1997 and 1998 at a total cost of $5.7 million.

Hanson sold its stake in Suburban Propane Partners in October 1996 to Suburban Propane GP, Inc., a wholly owned subsidiary of Millennium Petrochemicals Inc., which had formerly been Quantum Chemical Corporation. Millennium sold its share in the partnership—now 26.4 percent—for $75 million in May 1999 to Suburban Energy Services Group LLC, a new entity owned by senior management of the partnership. This firm replaced Millennium as general partner of Suburban Propane Partners.

Suburban Propane Partners sold 71 percent of its propane to retail customers and 29 percent to wholesale customers or for hedging activities in fiscal 1998. Retail customers consisted of residential customers (27 percent), commercial customers (18 percent), industrial customers (ten percent), agricultural customers (five percent), and other retail users (11 percent).

Suburban generally was making retail deliveries of propane to customers’ storage tanks by means of bobtail and rack trucks. The partnership also was delivering propane to retail customers in portable cylinders. Propane also was being delivered to certain other bulk end users, such as industrial, agricultural, and utility customers, in larger trucks called transports. Among Suburban’s suppliers of propane were its own storage facilities in Elk Grove, California, and Hattiesburg, Mississippi. In its wholesale operations, Suburban Propane Partners principally was selling propane to large bulk end-users, such as industrial, agricultural, and utility customers.