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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended December 27, 2003
Commission File Number: 1-14222
SUBURBAN PROPANE PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
DELAWARE 22-3410353
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
As of February 4, 2004, there were 30,256,767 Common Units outstanding.
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SUBURBAN PROPANE PARTNERS, L.P. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PART I Page
----
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets as of December 27, 2003
and September 27, 2003...............................................1
Condensed Consolidated Statements of Operations for the three
months ended December 27, 2003 and December 28, 2002................2
Condensed Consolidated Statements of Cash Flows for the three
months ended December 27, 2003 and December 28, 2002................3
Condensed Consolidated Statement of Partners' Capital for the
three months ended December 27, 2003.................................4
Notes to Condensed Consolidated Financial Statements.................5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...........................................12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..........21
ITEM 4. CONTROLS AND PROCEDURES.............................................23
PART II
ITEM 1. LEGAL PROCEEDINGS...................................................24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K....................................24
SIGNATURES....................................................................26
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 relating to the Partnership's future business expectations
and predictions and financial condition and results of operations. 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 involve certain
risks and uncertainties that could cause actual results to differ materially
from those discussed or implied in such Forward-Looking Statements ("Cautionary
Statements"). The risks and uncertainties and their impact on the Partnership's
operations include, but are not limited to, the following risks:
o The impact of weather conditions on the demand for propane, fuel oil and
other refined fuels;
o Fluctuations in the unit cost of propane, fuel oil and other refined fuels;
o The ability of the Partnership to compete with other suppliers of propane,
fuel oil and other energy sources;
o The impact on propane, fuel oil and other refined fuel prices and supply
from the political, military and economic instability of the oil producing
nations, global terrorism and other general economic conditions;
o The ability of the Partnership to realize fully, or within the expected
time frame, the expected cost savings and synergies from the acquisition of
Agway Energy;
o The ability of the Partnership to acquire and maintain reliable
transportation for its propane, fuel oil and other refined fuels;
o The ability of the Partnership to retain customers;
o The impact of energy efficiency and technology advances on the demand for
propane and fuel oil;
o The ability of management to continue to control expenses;
o 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;
o The impact of legal proceedings on the Partnership's business;
o The Partnership's ability to implement its expansion strategy into new
business lines and sectors; and
o 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 that the Partnership makes with the Securities and Exchange Commission
(the "SEC"), in the press releases or in oral statements made by or with the
approval of one of its authorized executive officers. Readers are cautioned not
to place undue reliance on Forward-Looking or Cautionary Statements, which
reflect management's opinions only as of the date made. The Partnership
undertakes no obligation to update any Forward-Looking 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.
SUBURBAN PROPANE PARTNERS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
DECEMBER 27, SEPTEMBER 27,
2003 2003
--------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents $ 52,646 $ 15,765
Accounts receivable, less allowance for doubtful accounts
of $4,847 and $2,519, respectively 147,606 36,437
Inventories 66,866 41,510
Prepaid expenses and other current assets 21,762 5,200
--------------- ---------------
Total current assets 288,880 98,912
Property, plant and equipment, net 431,653 312,790
Goodwill 275,447 243,236
Other intangible assets, net 28,161 1,035
Other assets 19,864 9,657
--------------- ---------------
Total assets $ 1,044,005 $ 665,630
=============== ===============
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable $ 74,195 $ 26,204
Accrued employment and benefit costs 25,206 20,798
Current portion of long-term borrowings 42,910 42,911
Accrued insurance 9,210 7,810
Customer deposits and advances 57,886 23,958
Accrued interest 14,875 7,457
Other current liabilities 18,022 8,575
--------------- ---------------
Total current liabilities 242,304 137,713
Long-term borrowings 515,915 340,915
Postretirement benefits obligation 33,587 33,435
Accrued insurance 17,830 20,829
Accrued pension liability 43,509 42,136
Other liabilities 12,682 6,524
--------------- ---------------
Total liabilities 865,827 581,552
--------------- ---------------
Commitments and contingencies
Partners' capital:
Common Unitholders (30,257 and 27,256 units issued and outstanding
at December 27, 2003 and September 27, 2003, respectively) 260,563 165,950
General Partner 1,634 1,567
Deferred compensation (5,954) (5,795)
Common Units held in trust, at cost 5,954 5,795
Unearned compensation (5,378) (2,171)
Accumulated other comprehensive loss (78,641) (81,268)
--------------- ---------------
Total partners' capital 178,178 84,078
--------------- ---------------
Total liabilities and partners' capital $ 1,044,005 $ 665,630
=============== ===============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
1
SUBURBAN PROPANE PARTNERS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED
-------------------------------------------
DECEMBER 27, DECEMBER 28,
2003 2002
----------------- -----------------
Revenues
Propane $ 187,200 $ 173,307
Other 33,911 26,281
----------------- -----------------
221,111 199,588
Costs and expenses
Cost of products sold 110,299 92,481
Operating 63,196 58,873
General and administrative 10,502 9,021
Depreciation and amortization 7,229 6,973
----------------- -----------------
191,226 167,348
Income before interest expense and provision for income taxes 29,885 32,240
Interest expense, net 9,711 8,856
----------------- -----------------
Income before provision for income taxes 20,174 23,384
Provision for income taxes 83 130
----------------- -----------------
Net income $ 20,091 $ 23,254
================= =================
General Partner's interest in net income $ 508 $ 591
----------------- -----------------
Limited Partners' interest in net income $ 19,583 $ 22,663
================= =================
Net income per Common Unit - basic $ 0.71 $ 0.92
----------------- -----------------
Weighted average number of Common Units outstanding - basic 27,626 24,631
----------------- -----------------
Net income per Common Unit - diluted $ 0.71 $ 0.92
----------------- -----------------
Weighted average number of Common Units outstanding - diluted 27,718 24,679
----------------- -----------------
The accompanying notes are an integral part of these condensed
consolidated financial statements.
2
SUBURBAN PROPANE PARTNERS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
----------------------------------------
DECEMBER 27, DECEMBER 28,
2003 2002
--------------- ---------------
Cash flows from operating activities:
Net income $ 20,091 $ 23,254
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation expense 7,106 6,856
Amortization of intangible assets 123 117
Amortization of debt origination costs 250 347
Amortization of unearned compensation 270 217
Gain on disposal of property, plant and
equipment, net (82) (346)
Changes in assets and liabilities, net of acquisition:
(Increase) in accounts receivable (39,378) (37,640)
(Increase) in inventories (11,660) (2,242)
(Increase)/decrease in prepaid expenses and
other current assets (1,800) 1,670
Increase in accounts payable 26,901 13,524
Increase/(decrease) in accrued employment
and benefit costs 2,305 (2,732)
Increase in accrued interest 7,418 8,028
Increase/(decrease) in other accrued liabilities 1,346 (3,159)
(Increase) in other noncurrent assets (130) (760)
(Decrease)/increase in other noncurrent liabilities (1,199) 1,244
--------------- ---------------
Net cash provided by operating activities 11,561 8,378
--------------- ---------------
Cash flows from investing activities:
Capital expenditures (5,164) (3,254)
Aquisition of Agway Energy, net of cash acquired (209,976) --
Proceeds from sale of property, plant and equipment 145 693
--------------- ---------------
Net cash used in investing activities (214,995) (2,561)
--------------- ---------------
Cash flows from financing activities:
Long-term debt repayments -- (58)
Long-term debt issuance 175,000
Expenses associated with debt agreements (5,797) --
Net proceeds from issuance of Common Units 87,566 --
Partnership distributions (16,454) (14,533)
--------------- ---------------
Net cash provided by/(used in) financing activities 240,315 (14,591)
--------------- ---------------
Net increase/(decrease) in cash and cash equivalents 36,881 (8,774)
Cash and cash equivalents at beginning of period 15,765 40,955
--------------- ---------------
Cash and cash equivalents at end of period $ 52,646 $ 32,181
=============== ===============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
SUBURBAN PROPANE PARTNERS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
(IN THOUSANDS)
(UNAUDITED)
Common
Number of Common General Deferred Units in
Common Units Unitholders Partner Compensation Trust
------------ ----------- ------- ------------ -----
Balance at September 27, 2003 27,256 $ 165,950 $ 1,567 $ (5,795) $ 5,795
Net income 19,583 508
Other comprehensive loss:
Net unrealized gains on cash
flow hedges
Reclassification of realized
losses on cash flow hedges into
earnings
Comprehensive income
Partnership distributions (16,013) (441)
Sale of Common Units under public
offering, net of expenses 2,990 87,566
Common Units issued under
Restricted Unit Plan 11
Common Units distributed
into trust (159) 159
Grants issued under Restricted
Unit Plan, net of forfeitures 3,477
Amortization of Restricted
Unit Plan, net of forfeitures
------- ---------- -------- -------- -------
Balance at December 27, 2003 30,257 $ 260,563 $ 1,634 $ (5,954) $ 5,954
======= ========== ======== ======== =======
Accumulated
Other Total
Unearned Comprehensive Partners' Comprehensive
Compensation (Loss) Capital Income
------------ ------ ------- ------
Balance at September 27, 2003 $ (2,171) $(81,268) $84,078
Net income 20,091 $ 20,091
Other comprehensive loss:
Net unrealized gains on cash
flow hedges 2,108 2,108 2,108
Reclassification of realized
losses on cash flow hedges into
earnings 519 519 519
--------
Comprehensive income $ 22,718
========
Partnership distributions (16,454)
Sale of Common Units under public
offering, net of expenses 87,566
Common Units issued under
Restricted Unit Plan -
Common Units distributed
into trust -
Grants issued under Restricted
Unit Plan, net of forfeitures (3,477) -
Amortization of Restricted
Unit Plan, net of forfeitures 270 270
-------- -------- --------
Balance at December 27, 2003 $ (5,378) $(78,641) $178,178
======== ======== ========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
SUBURBAN PROPANE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
(UNAUDITED)
1. BASIS OF PRESENTATION
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the
accounts of Suburban Propane Partners, L.P. (the "Partnership"), its partner and
its direct and indirect subsidiaries. All significant intercompany transactions
and accounts have been eliminated. The accompanying condensed consolidated
financial statements are unaudited and have been prepared in accordance with the
rules and regulations of the Securities and Exchange Commission. They include
all adjustments that the Partnership considers necessary for a fair statement of
the results for the interim periods presented. Such adjustments consist only of
normal recurring items, unless otherwise disclosed. These financial statements
should be read in conjunction with the Partnership's Annual Report on Form 10-K
for the fiscal year ended September 27, 2003, including management's discussion
and analysis of financial condition and results of operations contained therein.
Due to the seasonal nature of the Partnership's propane business, the results of
operations for interim periods are not necessarily indicative of the results to
be expected for a full year.
FISCAL PERIOD. The Partnership's fiscal periods end on the Saturday nearest the
end of the quarter.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. The Partnership enters into a
combination of 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 its operations, principally propane and heating oil, as well
as to ensure supply during periods of high demand. All derivative instruments
are reported on the balance sheet, within other current assets or other current
liabilities, at their fair values. On the date that futures, forward and option
contracts are entered into, the Partnership makes 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 it is, the type of hedge.
For derivative instruments designated as cash flow hedges, the Partnership
formally assesses, 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 cash flow hedges are recognized in cost of products sold
immediately. Changes in the fair value of derivative instruments that are not
designated as hedges are recorded in current period earnings within operating
expenses. A portion of the Partnership's 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.
At December 27, 2003, the fair value of derivative instruments described above
resulted in derivative assets of $8,365 included within prepaid expenses and
other current assets and derivative liabilities of $2,473 included within other
current liabilities. Operating expenses include unrealized (non-cash) losses in
the amount of $793 and $1,024 for the three months ended December 27, 2003 and
December 28, 2002, respectively, attributable to the change in fair value of
derivative instruments not designated as hedges. At December 27, 2003,
unrealized gains on derivative instruments designated as cash flow hedges in the
amount of $1,498 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.
5
USE OF ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Estimates have been made by management in the areas of
insurance and litigation reserves, environmental reserves, pension and other
postretirement benefit liabilities and costs, valuation of derivative
instruments, asset valuation assessment, as well as the allowance for doubtful
accounts. Actual results could differ from those estimates, making it reasonably
possible that a change in these estimates could occur in the near term.
2. ACQUISITION OF AGWAY ENERGY
On December 23, 2003, the Partnership closed on the purchase of substantially
all of the assets and operations of Agway Energy Products, LLC, Agway Energy
Services, Inc. and Agway Energy Services PA, Inc. (collectively referred to as
"Agway Energy") for $206,000 in cash, subject to certain purchase price
adjustments, pursuant to an asset purchase agreement dated November 10, 2003
(the "Acquisition"). Agway Energy, based in Syracuse, New York, is a leading
regional marketer of propane, fuel oil, gasoline and diesel fuel primarily in
New York, Pennsylvania, New Jersey and Vermont. To complement its core marketing
and delivery business, Agway Energy also installs and services a wide variety of
home comfort equipment, particularly in the areas of heating, ventilation and
air conditioning. The Acquisition is consistent with the Partnership's business
strategy of prudently pursuing acquisitions of retail propane distributors and
other energy-related businesses that can complement or supplement its core
propane operations and also expands our presence in the northeast energy market.
The Acquisition was financed through net proceeds of $87,566 from the issuance
of 2,990,000 Common Units in December 2003 (see Note 10) with the remainder
funded by a portion of the net proceeds from the offering of unsecured 6.875%
senior notes (see Note 6). The results of Agway Energy have been included in the
Partnership's consolidated financial statements from the date of the
Acquisition. A final determination of purchase accounting adjustments, including
the allocation of the purchase price to the assets acquired and liabilities
assumed based on their respective fair values, has not yet been finalized as of
December 27, 2003. As of December 27, 2003, the cost of the Acquisition has been
preliminarily allocated to the assets acquired and liabilities assumed according
to estimated fair values and is subject to adjustment when additional
information concerning asset and liability valuations are finalized. The
preliminary allocation has resulted in acquired goodwill of approximately
$32,200.
The following unaudited pro forma information presents the results of operations
of the Partnership as if the Acquisition had occurred at the beginning of the
periods shown. The pro forma information, however, is not necessarily indicative
of the results that would have resulted had the Acquisition occurred at the
beginning of the periods presented, nor is it necessarily indicative of future
results.
THREE MONTHS ENDED
----------------------------------------
DECEMBER 27, DECEMBER 28,
2003 2002
------------------ -------------------
Revenues $ 389,436 $ 385,844
Net income 24,259 33,582
Income per Common Unit - basic and diluted $ 0.78 $ 1.18
6
3. INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined using
a weighted average method for propane and refined fuels and a standard cost
basis for appliances, which approximates average cost. Inventories consist of
the following:
DECEMBER 27, SEPTEMBER 27,
2003 2003
------------------ -------------------
Propane and refined fuels $ 54,135 $ 34,033
Appliances 12,731 7,477
------------------ -------------------
$ 66,866 $ 41,510
================== ===================
4. INCOME PER UNIT
Basic income per Common Unit is computed by dividing income, after deducting the
General Partner's approximate 2.5% interest, by the weighted average number of
outstanding Common Units. Diluted income per Common Unit is computed by dividing
income, after deducting the General Partner's approximate 2.5% interest, by the
weighted average number of outstanding Common Units and time vested Restricted
Units granted under the 2000 Restricted Unit Plan. In computing diluted income
per Common Unit, weighted average units outstanding used to compute basic income
per Common Unit were increased by 91,422 units and 47,485 units for the three
months ended December 27, 2003 and December 28, 2002, respectively, to reflect
the potential dilutive effect of the time vested Restricted Units outstanding
using the treasury stock method. Net income is allocated to the Common
Unitholders and the General Partner in accordance with their respective
Partnership ownership interests, after giving effect to any priority income
allocations for incentive distributions allocated to the General Partner.
5. DISTRIBUTIONS OF AVAILABLE CASH
The Partnership makes distributions to its partners approximately 45 days after
the end of each fiscal quarter of the Partnership in an aggregate amount equal
to its Available Cash for such quarter. Available Cash, as defined in the Second
Amended and Restated Partnership Agreement, generally means all cash on hand at
the end of the respective fiscal quarter less the amount of cash reserves
established by the Board of Supervisors in its reasonable discretion for future
cash requirements. These reserves are retained for the proper conduct of the
Partnership's business, the payment of debt principal and interest and for
distributions during the next four quarters. Distributions by the Partnership in
an amount equal to 100% of its Available Cash will generally be made 98.29% to
the Common Unitholders and 1.71% to the General Partner prior to the public
offering described in Note 10 (the "Public Offering"), and 98.46% to the Common
Unitholders and 1.54% to the General Partner subsequent to the Public Offering,
subject to the payment of incentive distributions to the General Partner to the
extent the quarterly distributions exceed a target distribution of $0.55 per
Common Unit.
As defined in the Second Amended and Restated Partnership Agreement, the General
Partner has certain Incentive Distribution Rights ("IDRs") which represent an
incentive for the General Partner to increase distributions to Common
Unitholders in excess of the target quarterly distribution of $0.55 per Common
Unit. With regard to the first $0.55 per Common Unit of quarterly distributions
paid in any given quarter, 98.46% of the Available Cash is distributed to the
Common Unitholders and 1.54% is distributed to the General Partner (98.29% and
1.71%, respectively, prior to the Public Offering). With regard to the balance
of quarterly distributions in excess of the $0.55 per Common Unit target
distribution, 85% of the Available Cash is distributed to the Common Unitholders
and 15% is distributed to the General Partner.
On January 22, 2004, the Partnership declared a quarterly distribution of
$0.5875 per Common Unit, or $2.35 on an annualized basis, in respect of the
first quarter of fiscal 2004 payable on February 10, 2003 to holders of record
on
7
February 3, 2004. This quarterly distribution includes incentive distribution
rights payable to the General Partner to the extent the quarterly distribution
exceeds $0.55 per Common Unit.
6. LONG-TERM BORROWINGS
Long-term borrowings consist of the following:
DECEMBER 27, SEPTEMBER 27,
2003 2003
------------------ ------------------
Senior Notes, 7.54%, due June 30, 2011 $ 340,000 $ 340,000
Senior Notes, 6.875%, due December 15, 2013 175,000 -
Senior Notes, 7.37%, due June 30, 2012 42,500 42,500
Note payable, 8%, due in annual installments
through 2006 1,322 1,322
Amounts outstanding under the Revolving
Credit Agreement - -
Other long-term liabilities 3 4
------------------ ------------------
558,825 383,826
Less: current portion 42,910 42,911
------------------ ------------------
$ 515,915 $ 340,915
================== ==================
On December 23, 2003, the Partnership and Suburban Energy Finance Corporation,
the co-issuer and wholly-owned subsidiary of the Partnership, issued $175,000
aggregate principal amount of Senior Notes (the "2003 Senior Notes") with an
annual interest rate of 6.875% through a private placement under Rule 144A and
Regulation S of the Securities Act of 1933. The Partnership's obligations under
the 2003 Senior Notes are unsecured and will rank senior in right of payment to
any future subordinated indebtedness and equally in right of payment with any
future senior indebtedness. The 2003 Senior Notes are structurally subordinated
to, which means they rank effectively behind, the senior notes and other
liabilities of the Partnership's subsidiary operating partnership, Suburban
Propane, L.P. (the "Operating Partnership"). The Partnership has agreed,
pursuant to a registration rights agreement, to file a registration statement
with the Securities and Exchange Commission to register publicly-tradable notes
exchangeable for the 2003 Senior Notes with substantially the same terms as the
2003 Senior Notes. The 2003 Senior Notes will mature December 15, 2013, and
require semiannual interest payments beginning on June 15, 2004. The Partnership
may 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 (the "2003 Senior Note Agreement"). The 2003 Senior Note Agreement
contains certain restrictions applicable to the Partnership and certain of its
subsidiaries with respect to (i) the incurrence of additional indebtedness; and
(ii) liens, investments, guarantees, loans, advances, payments, mergers,
consolidations, distributions, sales of assets and other transactions.
On March 5, 1996, pursuant to a Senior Note Agreement (the "1996 Senior Note
Agreement"), the Operating Partnership issued $425,000 of Senior Notes (the
"1996 Senior Notes") with an annual interest rate of 7.54%. The Operating
Partnership's obligations under the 1996 Senior Note Agreement are unsecured and
rank on an equal and ratable basis with the Operating Partnership's obligations
under the 2002 Senior Note Agreement and the Revolving Credit Agreement
discussed below. The 1996 Senior Notes will mature June 30, 2011, and require
semiannual interest payments. Under the terms of the 1996 Senior Note Agreement,
the Operating Partnership is obligated to pay the principal on the 1996 Senior
Notes in equal annual payments of $42,500 which started July 1, 2002.
On July 1, 2002, the Operating Partnership received net proceeds of $42,500 from
the issuance of 7.37% Senior Notes due June, 2012 (the "2002 Senior Notes") and
used the funds to pay the first annual principal payment of $42,500 due under
the 1996 Senior Note Agreement. The Operating Partnership's obligations under
the agreement governing the 2002 Senior Notes (the "2002 Senior Note Agreement")
are unsecured and rank on an equal and ratable basis with the Operating
Partnership's obligations under the 1996 Senior Note Agreement and the Revolving
8
Credit Agreement. Rather than refinance the second annual principal payment of
$42,500 due under the 1996 Senior Note Agreement, the Partnership elected to
repay this principal payment on June 30, 2003.
On May 8, 2003, the Operating Partnership entered into the Second Amended and
Restated Credit Agreement which extended the Revolving Credit Agreement until
May 31, 2006 (as amended and restated, the "Revolving Credit Agreement"). The
Revolving Credit Agreement provides a $75,000 working capital facility and a
$25,000 acquisition facility. Borrowings under the Revolving Credit Agreement
bear interest at a rate based upon either LIBOR plus a margin, Wachovia National
Bank's prime rate or the Federal Funds rate plus 1/2 of 1%. An annual fee
ranging from .375% to .50%, based upon certain financial tests, is payable
quarterly whether or not borrowings occur. As of December 27, 2003 and September
27, 2003, there were no borrowings outstanding under the Revolving Credit
Agreement.
The 1996 Senior Note Agreement, the 2002 Senior Note Agreement and the Revolving
Credit Agreement contain various restrictive and affirmative covenants
applicable to the Operating Partnership; including (a) maintenance of certain
financial tests, including, but not limited to, a leverage ratio less than 5.0
to 1, an interest coverage ratio in excess of 2.50 to 1 and a leverage ratio of
less than 5.25 to 1 when the underfunded portion of the Partnership's pension
obligations is used in the computation of the ratio, (b) restrictions on the
incurrence of additional indebtedness, and (c) restrictions on certain liens,
investments, guarantees, loans, advances, payments, mergers, consolidations,
distributions, sales of assets and other transactions. The Partnership and the
Operating Partnership were in compliance with all covenants and terms of the
1996 Senior Note Agreement, the 2002 Senior Note Agreement, 2003 Senior Note
Agreement and the Revolving Credit Agreement as of December 27, 2003.
Debt origination costs representing the costs incurred in connection with the
placement of, and the subsequent amendments to, the Partnership's Senior Notes
and Revolving Credit Agreement were capitalized within other assets and are
being amortized on a straight-line basis over the term of the respective debt
agreements. In connection with the issuance of the 2003 Senior Notes, the
Partnership incurred debt origination costs of $5,675 which were capitalized
within other assets and will be amortized over the 10-year maturity of the 2003
Senior Notes. Other assets at December 27, 2003 and September 27, 2003 include
debt origination costs with a net carrying amount of $11,529 and $5,960,
respectively. Aggregate amortization expense related to deferred debt
origination costs included within interest expense for the three months ended
December 27, 2003 and December 28, 2002 was $250 and $347, respectively.
Interest expense, net for the three months ended December 27, 2003 included a
one-time fee of $1,936 related to a financing commitment received in connection
with the Acquisition.
7. 2000 RESTRICTED UNIT PLAN
During the first quarter of fiscal 2004, the Partnership awarded 115,730
Restricted Units under the 2000 Restricted Unit Plan at an aggregate value of
$3,546. Restricted Units issued under the 2000 Restricted Unit Plan vest over
time with 25% of the Common Units vesting at the end of each of the third and
fourth anniversaries of the issuance date and the remaining 50% of the Common
Units vesting at the end of the fifth anniversary of the issuance date.
Restricted Unit Plan participants are not eligible to receive quarterly
distributions or vote their respective Restricted Units until vested.
Restrictions also limit the sale or transfer of the Common Units by the award
recipients during the restricted periods. The value of the Restricted Unit is
established by the market price of the Common Units at the date of grant.
Restricted Units are subject to forfeiture in certain circumstances as defined
in the 2000 Restricted Unit Plan. Upon award of Restricted Units, the
unamortized unearned compensation value is shown as a reduction to partners'
capital. The unearned compensation is amortized ratably to expense over the
restricted periods.
8. COMMITMENTS AND CONTINGENCIES
The Partnership is self-insured for general and product, workers' compensation
and automobile liabilities up to predetermined amounts above which third party
insurance applies. At December 27, 2003 and September 27, 2003, the Partnership
had accrued insurance liabilities of $27,040 and $28,639, respectively,
representing the total estimated losses under these self-insurance programs. The
Partnership is also involved in various legal actions that
9
have arisen in the normal course of business, including those relating to
commercial transactions and product liability. Management believes, based on the
advice of legal counsel, that the ultimate resolution of these matters will not
have a material adverse effect on the Partnership's financial position or future
results of operations, after considering its self-insurance liability for known
and unasserted self-insurance claims.
The Partnership is subject to various laws and governmental regulations
concerning environmental matters and expects that it will be required to expend
funds to participate in remediation of these matters. In connection with the
Acquisition, the Partnership acquired certain surplus properties with either
known or probable environmental exposure, some of which are currently in varying
stages of investigation, remediation or monitoring. Additionally, the
Partnership identified that certain active sites acquired contained
environmental exposures which may require further investigation, future
remediation or ongoing monitoring activities. The environmental exposures
include instances of soil and/or groundwater contamination associated with the
handling and storage of fuel oil, gasoline and diesel fuel. In the preliminary
allocation of the purchase price to the assets acquired and liabilities assumed
in the Acquisition, the Partnership established an environmental reserve of
$7,000 ($2,500 within current liabilities and $4,500 within other long-term
liabilities). This reserve estimate was based on our current best estimate of
future costs for environmental investigations, remediation and ongoing
monitoring activities associated with acquired properties with either known or
probable environmental exposures.
Under the Purchase and Sale Agreement, however, the sellers have set aside
$15,000 from the total purchase price in a separate escrow account to fund any
such future environmental costs and expenses. Accordingly, in the preliminary
allocation of the purchase price, the Partnership established a corresponding
asset in the amount of $7,000 ($2,500 within other current assets and $4,500
within other assets) related to the future reimbursement from escrowed funds for
environmental spending. Under the terms of the Purchase and Sale Agreement, the
escrowed funds will be used to fund such environmental costs and expenses during
the first three years following the closing date of the Acquisition. Subject to
amounts withheld with respect to any pending claims made prior to the third
anniversary of the closing date of the Acquisition, any remaining escrowed funds
will be remitted to the sellers at the end of the three-year period.
Estimating the extent of the Partnership's responsibility for a particular site
and the method and ultimate cost of remediation of that site requires a number
of assumptions and estimates on the part of management. As a result, the
ultimate outcome of remediation of the sites may differ from current estimates.
As additional information becomes available, estimates will be adjusted as
necessary. Based on information currently available, and taking into
consideration the level of the environmental reserve and the $15,000
environmental escrow, management believes that any liability that may ultimately
result from changes in current estimates will not have a material impact on the
results of operations, financial position or cash flows of the Partnership.
9. GUARANTEES
The Partnership has residual value guarantees associated with certain of its
operating leases, related primarily to transportation equipment, with remaining
lease periods scheduled to expire periodically through fiscal 2009. Upon
completion of the lease period, the Partnership guarantees that the fair value
of the equipment will equal or exceed the guaranteed amount, or the Partnership
will pay the lessor the difference. Although the equipment's fair value at the
end of their lease term have historically exceeded the guaranteed amounts, the
maximum potential amount of aggregate future payments the Partnership could be
required to make under these leasing arrangements, assuming the equipment is
deemed worthless at the end of the lease term, is approximately $17,747. Of this
amount, the fair value of residual value guarantees for operating leases entered
into after December 31, 2002 was $2,067 which is reflected in other liabilities,
with a corresponding amount included within other assets, in the accompanying
condensed consolidated balance sheet as of December 27, 2003 and September 27,
2003.
10. PUBLIC OFFERING
On December 16, 2003, the Partnership sold 2,600,000 Common Units in a public
offering at a price of $30.90 per Common Unit realizing proceeds of $76,026, net
of underwriting commissions and other offering expenses. On December 23, 2003,
following the underwriters' full exercise of their over-allotment option, the
Partnership sold an
10
additional 390,000 Common Units at $30.90 per Common Unit, generating additional
net proceeds of $11,540. The aggregate net proceeds of $87,566 were used to fund
a portion of the purchase price for the Acquisition. These transactions
increased the total number of Common Units outstanding to 30,256,767. As a
result of the Public Offering, the combined General Partner interest in the
Partnership was reduced from 1.71% to 1.54% while the Common Unitholder interest
in the Partnership increased from 98.29% to 98.46%.
11. RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 132 (revised), "Employers'
Disclosures about Pensions and Other Postretirement Benefits" (the "revised SFAS
132"). The revised SFAS 132 replaces the current SFAS 132, of the same title.
The revised SFAS 132 requires additional disclosures regarding types of plan
assets held, investment strategies, measurement dates, plan obligations, cash
flows, and components of net periodic benefit cost/(expense). The revised SFAS
132 is effective for interim disclosures in the Partnership's 10-Q for the
second quarter ended March 27, 2004 and for annual disclosures in the
Partnership's 10-K for the year ended September 25, 2004.
12. SUBSEQUENT EVENT
On January 9, 2004, subsequent to the end of the first quarter of fiscal 2004,
the Partnership sold ten customer service centers in Texas, Oklahoma, Missouri
and Kansas for total cash proceeds of $23,000, plus payment for working capital
at the closing date. This divestiture is in line with the Partnership's strategy
of divesting operations in slower growing or non-strategic markets in an effort
to identify opportunities to optimize the return on assets employed. The
Partnership will record a gain on sale of approximately $14,000, which will be
reflected in the consolidated statement of operations during the second quarter
of fiscal 2004. Pursuant to Statement of Financial Accounting Standards ("SFAS")
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," the
individual captions on the consolidated statements of operations for the three
months ended December 27, 2003 and December 28, 2002 exclude the results from
these discontinued operations. The net impact on the Partnership's discontinued
operations was not significant for the periods presented.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is a discussion of the financial condition and results of
operations of the Partnership as of and for the three months ended December 27,
2003. The discussion should be read in conjunction with the historical
consolidated financial statements and notes thereto included in the Annual
Report on Form 10-K for the most recent fiscal year ended September 27, 2003.
FACTORS THAT AFFECT OUR OPERATING RESULTS AND FINANCIAL CONDITION
PRODUCT COSTS
The level of profitability in the retail propane and fuel oil businesses is
largely dependent on the difference between retail sales price and product cost.
The unit cost of propane and fuel oil is subject to volatile changes as a result
of product supply or other market conditions, including, but not limited to,
economic and political factors impacting crude oil and natural gas supply or
pricing. Product cost changes can occur rapidly over a short period of time and
can impact profitability. There is no assurance that we will be able to pass on
product cost increases fully or immediately, particularly when product costs
increase rapidly. Therefore, average retail sales prices can vary significantly
from year to year as product costs fluctuate with propane, fuel oil, crude oil
and natural gas commodity market conditions.
SEASONALITY
The retail propane and fuel oil distribution businesses are seasonal
because of propane and fuel oil's primary use for heating in residential and
commercial buildings. Historically, approximately two-thirds of our retail
propane volume is sold during the six-month peak heating season from 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
products purchased during the winter heating season. Lower operating profits and
either net losses or lower net income during the period from April through
September (our third and fourth fiscal quarters) are expected. To the extent
necessary, we will reserve cash from the second and third quarters for
distribution to Common Unitholders in the first and fourth fiscal quarters.
WEATHER
Weather conditions have a significant impact on the demand for propane and
fuel oil for both heating and agricultural purposes. Many of our customers rely
heavily on propane or fuel oil as a heating fuel. Accordingly, the volume sold
is directly affected by the severity of the winter weather in our service areas,
which can vary substantially from year to year. In any given area, sustained
warmer-than-normal temperatures will tend to result in reduced propane and fuel
oil use, while sustained colder-than-normal temperatures will tend to result in
greater use.
RISK MANAGEMENT
Product supply contracts are generally one-year agreements subject to
annual renewal and generally permit suppliers to charge posted market prices
(plus transportation costs) at the time of delivery or the current prices
established at major delivery points. Since rapid increases in the cost of
propane or fuel oil may not be immediately passed on to retail customers, such
increases could reduce profit margins. We engage in risk management activities
to reduce the effect of price volatility on our product costs and to help ensure
the availability of product during periods of short supply. We are currently a
party to propane and fuel oil futures contracts traded on the New York
Mercantile Exchange (the "NYMEX") and enter into forward and option agreements
with third parties to purchase and sell propane or fuel oil at fixed prices in
the future. Risk management activities are monitored by an internal Risk
Committee, made up of five members of management, through enforcement of our
Commodity Trading Policy and reported to our Audit Committee. Risk management
transactions may not always result in increased product margins. See the
additional discussion in Item 3 of this Quarterly Report.
12
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Certain amounts included in or affecting our consolidated financial
statements and related disclosures must be estimated, requiring management to
make certain assumptions with respect to values or conditions that cannot be
known with certainty at the time the financial statements are prepared. The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. We are also subject to risks and uncertainties that
may cause actual results to differ from estimated results. Estimates are used
when accounting for depreciation and amortization of long-lived assets, employee
benefit plans, self-insurance and legal reserves, environmental reserves,
allowance for doubtful accounts, asset valuation assessment and valuation of
derivative instruments. We base our estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Any effects on our business, financial position or results of
operations resulting from revisions to these estimates are recorded in the
period in which the facts that give rise to the revision become known to us.
Our significant accounting policies are summarized in Note 2 - Summary of
Significant Accounting Policies included within the Notes to Consolidated
Financial Statements section of the Annual Report on Form 10-K for the most
recent fiscal year ended September 27, 2003. We believe that the following are
our critical accounting policies:
REVENUE RECOGNITION. We recognize revenue from the sale of propane and fuel oil
at the time product is delivered to the customer. Revenue from the sale of
appliances and equipment is recognized at the time of sale or when installation
is complete, as applicable. Revenue from repair and maintenance activities is
recognized upon completion of the service.
ALLOWANCE FOR DOUBTFUL ACCOUNTS. We maintain allowances for doubtful accounts
for estimated losses resulting from the inability of our customers to make
required payments. We estimate our allowance for doubtful accounts using a
specific reserve for known or anticipated uncollectible accounts, as well as an
estimated reserve for potential future uncollectible accounts taking into
consideration our historical write-offs. If the financial condition of one or
more of our customers were to deteriorate resulting in an impairment in their
ability to make payments, additional allowances could be required.
PENSION AND OTHER POSTRETIREMENT BENEFITS. We estimate the rate of return on
plan assets, the discount rate to estimate the present value of future benefit
obligations and the cost of future health care benefits in determining our
annual pension and other postretirement benefit costs. In accordance with
generally accepted accounting principles, actual results that differ from our
assumptions are accumulated and amortized over future periods and therefore,
generally affect our recognized expense and recorded obligation in such future
periods. While we believe that our assumptions are appropriate, significant
differences in our actual experience or significant changes in market conditions
may materially affect our pension and other postretirement obligations and our
future expense. See the Liquidity and Capital Resources section of Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations in the Annual Report on Form 10-K for the year ended September 27,
2003 for additional disclosure regarding pension and other postretirement
benefits.
SELF-INSURANCE RESERVES. Our accrued insurance reserves represent the estimated
costs of known and anticipated or unasserted claims under our general and
product, workers' compensation and automobile insurance policies. Accrued
insurance provisions for unasserted claims arising from unreported incidents are
based on an analysis of historical claims data. For each claim, we record a
self-insurance provision up to the estimated amount of the probable claim or the
amount of the deductible, whichever is lower, utilizing actuarially determined
loss development factors applied to actual claims data.
13
GOODWILL IMPAIRMENT ASSESSMENT. We assess the carrying value of goodwill at a
reporting unit level, at least annually, based on an estimate of the fair value
of the respective reporting unit. Fair value of the reporting unit is estimated
using either (i) a market value approach taking into consideration the quoted
market price of our Common Units; or (ii) discounted cash flow analyses taking
into consideration estimated cash flows in a ten-year projection period and a
terminal value calculation at the end of the projection period.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. See Item 3 of this Quarterly
Report for additional information about accounting for derivative instruments
and hedging activities.
EXECUTIVE SUMMARY OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
During the first quarter of fiscal 2004, we experienced several significant
events that are expected to transform the future of our Partnership, highlighted
by the acquisition, on December 23, 2003, of substantially all of the assets and
operations of Agway Energy for $206.0 million in cash, subject to post-closing
purchase price adjustments (the "Acquisition"). Agway Energy is a leading
regional marketer of propane, fuel oil, gasoline and diesel fuel primarily in
New York, Pennsylvania, New Jersey and Vermont, serving over 400,000
residential, commercial and agricultural customers. Agway Energy also has an
extensive presence in the northeast market in the service, maintenance and
installation of a wide variety of home comfort equipment, particularly in the
area of heating, ventilation and air conditioning ("HVAC"). In the northeast
energy market, the addition of Agway Energy is expected to (i) significantly
expand our presence, (ii) expand our product offerings to include fuel oil,
gasoline and diesel fuel as a complement to our propane distribution, (iii)
enhance our service offerings to our customer base through the addition of Agway
Energy's HVAC business, and (iv) provide opportunities for cost savings in the
combined business from integrating back office functions, office space and
certain field operations. The results of Agway Energy have been included in our
consolidated results of operations for the three months ended December 27, 2003
since the date of the Acquisition (December 23, 2003).
The total cost of the Acquisition of approximately $210.0 million,
consisting of the $206.0 million purchase price, plus fees and expenses
associated with the Acquisition, was funded through a combination of net
proceeds from the issuance of 2,990,000 Common Units and the issuance of 6.875%
senior notes during December 2003. During December 2003, we successfully
completed the issuance of 2,990,000 Common Units (including 390,000 upon the
underwriters' full exercise of their over-allotment option) at a price of $30.90
per Common Unit resulting in net proceeds of approximately $87.6 million which
were used to fund a portion of the total cost of the Acquisition. The issuance
of additional Common Units increased the total number of outstanding Common
Units to 30,256,767. Additionally, concurrent with the December 23, 2003 closing
of the Acquisition, we issued $175.0 million in aggregate principal amount of
our unsecured 6.875% senior notes due in 2013 for net proceeds of approximately
$169.3 million, after deducting the underwriting discount and certain costs and
expenses associated with the offering. We used approximately $122.4 million from
the issuance of the 6.875% senior notes to fund the remainder of the total cost
of the Acquisition and the remaining net proceeds will be used for general
partnership purposes, which may include working capital purposes, capital
expenditures or debt reduction.
From an operational perspective, the impact of the contribution from Agway
Energy was not significant for the three months ended December 27, 2003 as a
result of the close proximity of the closing date of the Acquisition to the end
of our first fiscal quarter of 2004. Our results of operations for the three
months ended December 27, 2003 were most impacted by the warmer-than-normal
average temperatures across all of our service areas for the first quarter of
fiscal 2004. Nationwide average temperatures, as reported by the National
Oceanic and Atmospheric Administration ("NOAA"), averaged 7% warmer than normal
in the first quarter of fiscal 2004 compared to 2% colder than normal in the
prior year quarter, or 9% warmer temperatures year-over-year. As a result of the
warmer-than-normal average temperatures, our retail propane volumes declined 8.0
million gallons, or 5.7%, to 131.9 million gallons for the three months ended
December 27, 2003 compared to 139.9 million gallons in the prior year quarter.
Combined operating and general and administrative expenses increased $5.8
million, or 8.5%, to $73.7 million for the three months ended December 27, 2003.
The increase was primarily as a result of $3.1 million higher employee
compensation and benefit related expenses, $0.4 million higher pension costs,
$0.4 million higher
14
insurance costs, as well as from the addition of the Agway Energy operations
from the date of Acquisition. As a result of the lower retail propane gallons
sold and the increase in combined operating and general and administrative
expenses, EBITDA (as defined and reconciled below) of $37.1 million for the
three months ended December 27, 2003 was $2.1 million, or 5.4%, lower than
EBITDA of $39.2 million in the prior year quarter.
Interest expense, net increased $0.8 million, or 9.0%, to $9.7 million in
the first quarter of fiscal 2004 compared to $8.9 million in the prior year
quarter, primarily as a result of a one-time fee of $1.9 million related to
financing commitments for the Acquisition of Agway Energy. Offsetting the impact
of the one-time fee of $1.9 million, net interest expense decreased as a result
of lower amounts outstanding under our Revolving Credit Agreement and $42.5
million lower amounts outstanding under our 7.54% senior notes. We had no
amounts outstanding under our Revolving Credit Agreement as of December 27, 2003
and ended the quarter with approximately $52.6 million in cash and cash
equivalents at December 27, 2003.
As we look ahead to the remainder of fiscal 2004, our operations may be
impacted by certain factors beyond our control, including, but not limited to, a
volatile commodity price environment and continued warmer weather conditions in
our service areas. Additionally, we will be faced with a new set of challenges
as we look to successfully integrate the Agway Energy operations over the next
several quarters. This integration will require management's attention, as well
as additional capital resources as we integrate systems, processes and
facilities. Based on our current estimates of our cash flow from operations, our
strong cash position at the end of the first quarter of fiscal 2004 and our
availability under the Revolving Credit Agreement (unused borrowing capacity
under the working capital facility of $69.5 million at December 27, 2003), we
expect to have sufficient funds to meet our current and future obligations,
including the additional cash requirements to fund our integration efforts.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 27, 2003 COMPARED TO THREE MONTHS ENDED
DECEMBER 28, 2002
Revenues. Revenues increased 10.8%, or $21.5 million, to $221.1 million for
the three months ended December 27, 2003 compared to $199.6 million for the
three months ended December 28, 2002. Revenues from retail propane activities
increased $11.1 million, or 6.6%, to $178.8 million for the three months ended
December 27, 2003 compared to $167.7 million in the prior year quarter. This
increase is the result of an increase in average selling prices, offset to an
extent by a decrease in retail gallons sold. Average selling prices increased
approximately 12.0% as a result of sustained higher commodity prices for
propane. The average posted price of propane during the first quarter of fiscal
2004 increased approximately 17% compared to the average posted prices in the
prior year quarter. Retail propane gallons sold decreased 8.0 million gallons,
or 5.7%, to 131.9 million gallons in the first quarter of fiscal 2004 compared
to 139.9 million gallons in the prior year quarter. The decrease in retail
propane gallons sold was primarily attributable to warmer nationwide average
temperatures during the first quarter of fiscal 2004 compared to the prior year
quarter. Temperatures nationwide, as reported by NOAA, averaged 7% warmer than
normal in the first quarter of fiscal 2004 compared to 2% colder than normal in
the prior year quarter, or 9% warmer temperatures year-over-year.
Revenues from wholesale and risk management activities of $8.4 million for
the three months ended December 27, 2003 increased $2.7 million, compared to
revenues of $5.7 million for the three months ended December 28, 2002. The
increase in wholesale and risk management activities results from slightly
higher volumes sold in the wholesale market, combined with an increase in the
average selling prices. Revenue from other sources, including sales of
appliances and related parts and services, of $33.9 million for the three months
ended December 27, 2003 increased $7.6 million, or 28.9%, compared to other
revenue in the prior year quarter of $26.3 million. The increase in other
revenues is primarily attributable to the addition of service and maintenance
revenues from Agway Energy from the date of the Acquisition.
Cost of Products Sold. The cost of products sold reported in the
consolidated statements of operations represents the weighted average unit cost
of propane and fuel oil sold, 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
15
the average cost of the products. Cost of products sold is reported exclusive of
any depreciation and amortization as such amounts are reported separately within
the consolidated statements of operations.
Cost of products sold increased $17.8 million, or 19.2%, to $110.3 million
for the three months ended December 27, 2003 compared to $92.5 million in the
prior year quarter. The increase results primarily from a $15.2 million impact
from the aforementioned increase in propane commodity prices resulting in a
20.4% increase in the average unit cost of propane during the three months ended
December 27, 2003 compared to the prior year quarter, as well as $4.6 million
from higher costs of appliance sales and related parts and services in line with
the increase in other revenues noted above. The increases were offset to an
extent by a $4.5 million impact of lower retail propane volumes sold. For the
three months ended December 27, 2003, cost of products sold represented 49.9% of
revenues compared to 46.3% in the prior year period. The increase in the cost of
products sold as a percentage of revenues relates primarily to the mix of sales
between retail propane and other revenues during the quarter, as well as the
impact of the aforementioned increase in wholesale and risk management revenues
which have lower margins.
Operating Expenses. All other 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. Operating expenses increased
7.3%, or $4.3 million, to $63.2 million for the three months ended December 27,
2003 compared to $58.9 million for the three months ended December 28, 2002.
Operating expenses in the first quarter of fiscal 2004 include a $0.8 million
unrealized (non-cash) loss representing the net change in fair values of
derivative instruments during the quarter, compared to a $1.0 million unrealized
loss in the prior year quarter (see Item 3 Quantitative and Qualitative
Disclosures About Market Risk for information on our policies regarding the
accounting for derivative instruments). In addition to the non-cash impact of
changes in the fair value of derivative instruments, operating expenses
increased $4.5 million as a result of $2.3 million increased employee
compensation and benefit costs, $0.4 million higher pension costs, $0.4 million
increased insurance costs and $0.4 million higher medical costs.
General and Administrative Expenses. 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 $10.5 million for the three months ended December 27,
2003 were $1.5 million, or 16.7%, higher than the prior year quarter of $9.0
million. The increase was primarily attributable to the impact of $0.8 million
higher employee compensation and benefit costs, as well as additional costs
incurred during the first quarter of fiscal 2004 in connection with the
transition and integration of Agway Energy from the date of the Acquisition.
Depreciation and Amortization. Depreciation and amortization expense
increased 3.7% to $7.2 million for the three months ended December 27, 2003
primarily as a result of the additional depreciation attributable to the
acquired assets.
Income Before Interest Expense and Income Taxes and EBITDA. Income before
interest expense and income taxes of $29.9 million in the three months ended
December 27, 2003 decreased $2.3 million, or 7.1%, compared to $32.2 million in
the prior year quarter. Earnings before interest, taxes, depreciation and
amortization ("EBITDA") amounted to $37.1 million for the three months ended
December 27, 2003, compared to $39.2 million for the prior year quarter, a
decrease of $2.1 million, or 5.4%. The declines in income before interest
expense and income taxes and in EBITDA compared to the prior year quarter
reflect the impact of lower retail propane volumes attributable to warmer
average nationwide temperatures and the higher combined operating and general
and administrative expenses described above.
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
16
obligations and to pay our quarterly distributions to holders of our Common
Units. Moreover, our senior note agreements and our Revolving Credit Agreement
require us to use EBITDA as a component in calculating our leverage and interest
coverage ratios. EBITDA is not a recognized term under generally accepted
accounting principles ("GAAP") and should not be considered as an alternative to
net income or net cash provided by operating activities determined in accordance
with GAAP. Because EBITDA as determined by us excludes some, but not all, items
that affect net income, it may not be comparable to EBITDA or similarly titled
measures used by other companies. The following table sets forth (i) our
calculation of EBITDA and (ii) a reconciliation of EBITDA, as so calculated, to
our net cash provided by operating activities (amounts in thousands):
THREE MONTHS ENDED
----------------------------------
DECEMBER 27, DECEMBER 28,
2003 2002
------------- -------------
Net income $ 20,091 $ 23,254
Add:
Provision for income taxes 83 130
Interest expense, net 9,711 8,856
Depreciation and amortization 7,229 6,973
------------- -------------
EBITDA 37,114 39,213
------------- -------------
Add / (subtract):
Provision for income taxes (83) (130)
Interest expense, net (9,711) (8,856)
Gain on disposal of property, plant and equipment, net (82) (346)
Changes in working capital and other assets and liabilities (15,677) (21,503)
------------- -------------
Net cash provided by operating activities $ 11,561 $ 8,378
============= =============
Net cash used in investing activities $ (214,995) $ (2,561)
============= =============
Net cash provided by / (used in) financing activities $ 240,315 $ (14,591)
============= =============
Interest Expense. Net interest expense increased $0.8 million, or 9.0%, to
$9.7 million in the first quarter of fiscal 2004 compared to $8.9 million in the
prior year quarter, primarily as a result of a one-time fee of $1.9 million
related to financing commitments for the Acquisition. Offsetting the impact of
the one-time fee of $1.9 million, net interest expense decreased as a result of
lower amounts outstanding under our Revolving Credit Agreement and $42.5 million
lower amounts outstanding under our 7.54% senior notes.
LIQUIDITY AND CAPITAL RESOURCES
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. For the three months ended December 27,
2003, net cash provided by operating activities was $11.6 million compared to
net cash provided by operating activities of $8.4 million for the three months
ended December 28, 2002. The increase of $3.2 million, or 38.1%, was primarily
due to a $7.7 million favorable impact of changes in working capital in
comparison to the prior year quarter, offset by $3.0 million lower income,
including the impact of non-cash items in both periods (depreciation,
amortization and gains on disposal of assets). The changes in working capital
result primarily from an increase in accounts payable in line with an increased
investment in inventories entering the second quarter of fiscal 2004 compared to
the prior year, driven primarily by an increase in commodity prices.
Net cash used in investing activities of $215.0 million for the three
months ended December 27, 2003 consisted primarily of the total cost of the
Acquisition of Agway Energy of approximately $210.0 million, as well as capital
expenditures of $5.2 million (including $0.4 million for maintenance
expenditures and $4.8 million to support the growth of operations); offset by
net proceeds of $0.2 million from the sale of property, plant and equipment
during the first quarter of fiscal 2004. Net cash used in investing activities
during the three months ended December 28, 2002 consisted of capital
expenditures of $3.3 million (including $0.5 million for maintenance
expenditures and
17
$2.8 million to support the growth of operations), offset to an extent by
the net proceeds from the sale of assets of $0.7 million.
Net cash provided by financing activities for the three months ended
December 27, 2003 was $240.3 million as a result of (i) the issuance of $175.0
million aggregate principal amount of 6.875% senior notes due 2013, a portion of
which was used to fund a portion of the Acquisition and, (ii) the net proceeds
of $87.6 million from a follow-on public offering of 2,990,000 Common Units
(including full exercise of the underwriters' over-allotment option) during
December 2003 to fund a portion of the Acquisition; offset by (i) the payment of
our quarterly distributions of $0.5875 per Common Unit during the first quarter
of fiscal 2004 amounting to $16.5 million and, (ii) $5.8 million in fees
associated with the issuance of the senior notes noted above. Net cash used in
financing activities for the three months ended December 28, 2002 was $14.6
million, reflecting payment of our quarterly distributions of $0.5750 during the
first quarter of fiscal 2002.
On December 23, 2003, we issued $175.0 million aggregate principal amount
of senior notes (the "2003 Senior Notes") with an annual interest rate of 6.875%
through a private placement under Rule 144A and Regulation S of the Securities
Act of 1933. We used approximately $122.4 million from the issuance of the
6.875% senior notes to fund the remainder of the total cost of the Acquisition
and the remaining net proceeds will be used for general partnership purposes,
which may include working capital purposes, capital expenditures or debt
reduction. Our obligations under the 2003 Senior Notes are unsecured and will
rank senior in right of payment to any future subordinated indebtedness and
equally in right of payment with any future senior indebtedness. The 2003 Senior
Notes are structurally subordinated to, which means they rank effectively
behind, the senior notes and other liabilities of the Operating Partnership. We
have agreed, pursuant to a registration rights agreement, to file a registration
statement with the SEC to register publicly-tradable notes exchangeable for the
2003 Senior Notes with substantially the same terms as the 2003 Senior Notes.
The 2003 Senior Notes will mature December 15, 2013, and require semiannual
interest payments beginning on June 15, 2004. We may 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 (the "2003 Senior
Note Agreement"). The 2003 Senior Note Agreement contains certain restrictions
applicable to us and certain of our subsidiaries with respect to (i) the
incurrence of additional indebtedness; and (ii) liens, investments, guarantees,
loans, advances, payments, mergers, consolidations, distributions, sales of
assets and other transactions.
On March 5, 1996, pursuant to a Senior Note Agreement (the "1996 Senior
Note Agreement"), our Operating Partnership issued $425.0 million of senior
notes (the "1996 Senior Notes") with an annual interest rate of 7.54%. Our
Operating Partnership's obligations under the 1996 Senior Note Agreement are
unsecured and rank on an equal and ratable basis with its obligations under the
2002 Senior Note Agreement and the Revolving Credit Agreement discussed below.
Under the terms of the 1996 Senior Note Agreement, our Operating Partnership
became obligated to pay the principal on the 1996 Senior Notes in equal annual
payments of $42.5 million starting July 1, 2002, with the last such payment due
June 30, 2011. On July 1, 2002, we received net proceeds of $42.5 million from
the issuance by our Operating Partnership of 7.37% Senior Notes due June, 2012
(the "2002 Senior Notes") and used the funds to pay the first annual principal
payment of $42.5 million due under the 1996 Senior Note Agreement. Our Operating
Partnership's obligations under the agreement governing the 2002 Senior Notes
(the "2002 Senior Note Agreement") are unsecured and rank on an equal and
ratable basis with its obligations under the 1996 Senior Note Agreement and the
Revolving Credit Agreement. Rather than refinance the second annual principal
payment of $42.5 million due under the 1996 Senior Note Agreement, we elected to
repay this principal payment on June 30, 2003.
Our Operating Partnership's Revolving Credit Agreement, which provided a
$75.0 million working capital facility and a $25.0 million acquisition facility,
matures on May 31, 2006. Borrowings under the Revolving Credit Agreement bear
interest at a rate based upon either LIBOR plus a margin, Wachovia National
Bank's prime rate or the Federal Funds rate plus 1/2 of 1%. An annual fee
ranging from .375% to .50%, based upon certain financial tests, is payable
quarterly whether or not borrowings occur. As of December 27, 2003 and September
27, 2003, there were no borrowings outstanding under the Revolving Credit
Agreement. As of December 27, 2003, we had $69.5 million of unused borrowing
capacity under the working capital facility of our Revolving Credit Agreement.
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The 1996 Senior Note Agreement, the 2002 Senior Note Agreement and the
Revolving Credit Agreement contain various restrictive and affirmative covenants
applicable to the Operating Partnership, including (a) maintenance of certain
financial tests, including, but not limited to, a leverage ratio of less than
5.0 to 1, an interest coverage ratio in excess of 2.5 to 1 and a leverage ratio
of less than 5.25 to 1 when the underfunded portion of our pension obligations
is used in the computation of the ratio, (b) restrictions on the incurrence of
additional indebtedness, and (c) restrictions on certain liens, investments,
guarantees, loans, advances, payments, mergers, consolidations, distributions,
sales of assets and other transactions. Our Operating Partnership was in
compliance with all covenants and terms of all of its debt agreements as of
December 27, 2003 and at the end of each fiscal quarter for all periods
presented.
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 22, 2004, we declared a quarterly distribution of $0.5875
per Common Unit, or $2.35 on an annualized basis, in respect of the first
quarter of fiscal 2004 payable on February 10, 2004 to Common Unitholders of
record on February 3, 2004.
Quarterly distributions include Incentive Distribution Rights ("IDRs")
payable to the 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 the 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 (98.29% and 1.71%, respectively, prior to our December
2003 public offering). 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. Additionally, as
previously announced on December 3, 2003, we intend to increase our quarterly
distribution rate from $0.5875 per Common Unit to $0.60 per Common Unit
effective for distributions payable in respect of our second fiscal quarter of
2004, subject to declaration by our Board of Supervisors. The first distribution
at this increased level is expected to be payable in May 2004.
LONG-TERM DEBT OBLIGATIONS AND OTHER COMMITMENTS
Long-term debt obligations and future minimum rental commitments under
noncancelable operating lease agreements as of December 27, 2003 are due as
follows (amounts in thousands):
REMAINDER FISCAL
OF FISCAL FISCAL FISCAL FISCAL 2008 AND
2004 2005 2006 2007 THEREAFTER TOTAL
------------ ------------ ------------ ------------ ------------ ------------
Long-term debt $ 42,910 $ 42,940 $ 42,975 $ 42,500 $ 387,500 $ 558,825
Operating leases 14,539 12,746 9,695 5,786 6,415 49,181
------------ ------------ ------------ ------------ ------------ ------------
Total long-term debt obligations
and lease commitments $ 57,449 $ 55,686 $ 52,670 $ 48,286 $ 393,915 $ 608,006
============ ============ ============ ============ ============ ============
Additionally, we have standby letters of credit in the aggregate amount of
$35.4 million, in support of our casualty insurance coverage and certain lease
obligations, which expire periodically through March 1, 2004.
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 2009. 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
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of the lease term, is approximately $17.7 million. Of this amount, the fair
value of residual value guarantees for operating leases entered into after
December 31, 2002 was $2.1 million which is reflected in other liabilities, with
a corresponding amount included within other assets, in the accompanying
condensed consolidated balance sheets as of both December 27, 2003 and September
27, 2003.
PUBLIC OFFERING
On December 16, 2003, we sold 2,600,000 Common Units in a public offering
at a price of $30.90 per Common Unit realizing proceeds of $76.0 million, net of
underwriting commissions and other offering expenses. On December 23, 2003,
following the underwriters' full exercise of their over-allotment option, we
sold an additional 390,000 Common Units at $30.90 per Common Unit, generating
additional net proceeds of $11.6 million. The aggregate net proceeds of $87.6
million were used to fund a portion of the purchase price for the Acquisition.
These transactions increased the total number of Common Units outstanding to
30,256,767. As a result of the Public Offering, the combined General Partner
interest was reduced from 1.71% to 1.54% while the Common Unitholder interest
increased from 98.29% to 98.46%.
RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2003, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 132 (revised), "Employers'
Disclosures about Pensions and Other Postretirement Benefits" (the "revised SFAS
132"). The revised SFAS 132 replaces the current SFAS 132, of the same title.
The revised SFAS 132 requires additional disclosures regarding types of plan
assets held, investment strategies, measurement dates, plan obligations, cash
flows, and components of net periodic benefit cost/(expense). The revised SFAS
132 is effective for interim disclosures beginning in our 10-Q for the second
quarter ended March 27, 2004 and for annual disclosures beginning in our 10-K
for the year ended September 25, 2004.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains Forward-Looking Statements as
defined in the Private Securities Litigation Reform Act of 1995 relating to the
Partnership's future business expectations and predictions and financial
condition and results of operations. 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 involve certain risks and
uncertainties that could cause actual results to differ materially from those
discussed or implied in such Forward-Looking Statements. The risks and
uncertainties and their impact on the Partnership's operations include, but are
not limited to, the following risks:
o The impact of weather conditions on the demand for propane, fuel oil and
other refined fuels;
o Fluctuations in the unit cost of propane, fuel oil and other refined fuels;
o The ability of the Partnership to compete with other suppliers of propane,
fuel oil and other energy sources;
o The impact on propane, fuel oil and other refined fuel prices and supply
from the political, military and economic instability of the oil producing
nations, global terrorism and other general economic conditions;
o The ability of the Partnership to realize fully, or within the expected
time frame, the expected cost savings and synergies from the acquisition of
Agway Energy;
o The ability of the Partnership to acquire and maintain reliable
transportation for its propane, fuel oil and other refined fuels;
o The ability of the Partnership to retain customers;
o The impact of energy efficiency and technology advances on the demand for
propane and fuel oil;
o The ability of management to continue to control expenses;
o 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;
20
o The impact of legal proceedings on the Partnership's business;
o The Partnership's ability to implement its expansion strategy into new
business lines and sectors; and
o The Partnership's ability to integrate acquired businesses successfully.
On different occasions, the Partnership or its representatives have made or
may make Forward-Looking Statements in other filings that the Partnership makes
with the SEC, in press releases or in oral statements made by or with the
approval of one of its authorized executive officers. Readers are cautioned not
to place undue reliance on Forward-Looking or Cautionary Statements, which
reflect management's opinions only as of the date made. The Partnership
undertakes no obligation to update any Forward-Looking 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of December 27, 2003, 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 its 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; 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.
Market risks associated with the trading of futures, options and forward
contracts are monitored daily for compliance with our trading policy which
includes volume limits for open positions. Open inventory positions are reviewed
and managed daily as to exposures to changing market prices.
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.
CREDIT RISK
Futures are guaranteed by the NYMEX and, as a result, have minimal credit
risk. We are subject to credit risk with forward and 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.
DERIVATIVE INSTRUMENTS
We account for derivative instruments in accordance with the provisions of
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133"), as amended by SFAS No. 137 and SFAS No. 138. All derivative
instruments are reported on the balance sheet, within other current assets or
other current liabilities, at their fair values. 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 it is, 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
21
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 cash flow hedges are recognized in cost of products sold
immediately. Changes in the fair value of derivative instruments that are not
designated as hedges are recorded in current period earnings within operating
expenses. 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. Fair values for forward contracts and
futures are derived from quoted market prices for similar instruments traded on
the NYMEX.
At December 27, 2003, the fair value of derivative instruments described
above resulted in derivative assets of $8.4 million included within prepaid
expenses and other current assets and derivative liabilities of $2.5 million
included within other current liabilities. Operating expenses include unrealized
(non-cash) losses in the amount of $0.8 million and $1.0 million for the three
months ended December 27, 2003 and December 28, 2002, respectively, attributable
to the change in fair value of derivative instruments not designated as hedges.
At December 27, 2003, unrealized gains on derivative instruments designated as
cash flow hedges in the amount of $1.5 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 the exposure of unfavorable market price
movements, a sensitivity analysis of open positions as of December 27, 2003 was
performed. Based on this analysis, a hypothetical 10% adverse change in market
prices for each of the future months for which an option, futures and/or forward
contract exists indicates either a reduction in potential future gains or
potential losses in future earnings of $2.7 million and $0.7 million as of
December 27, 2003 and December 28, 2002, respectively. See also Item 7A of our
Annual Report on Form 10-K for the fiscal year ended September 27, 2003.
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.
22
ITEM 4. CONTROLS AND PROCEDURES
Our management, including our principal executive officer and principal
financial officer, have evaluated the effectiveness of our "disclosure controls
and procedures" (as defined in Rule 13a-15(e) of the Securities Exchange Act of
1934) as of December 27, 2003. Based on such evaluation, our principal executive
officer and principal financial officer have concluded that as of December 27,
2003, such disclosure controls and procedures are effective for the purpose of
ensuring that material information required to be in this Quarterly Report on
Form 10-Q is made known to them by others on a timely basis. There have not been
any changes in our internal control over financial reporting (as defined in Rule
13a-15(f) of the Securities Exchange Act of 1934) during the quarter ending
December 27, 2003 that have materially affected or are reasonably likely to
materially affect our internal control over financial reporting.
23
PART II
ITEM 1. LEGAL PROCEEDINGS
On May 23, 2001, our Operating Partnership was named as an additional
defendant in an action previously brought by Heritage Propane Partners against
SCANA Corporation and Cornerstone Ventures, L.P. arising out of our acquisition
of substantially all of the propane assets of SCANA in November of 1999. We
believe that all of the claims asserted against our Operating Partnership are
without merit and are defending the action vigorously. The court has entered an
order setting this matter for trial beginning on October 4, 2004. At the close
of discovery, we intend to file a motion for summary judgment to dismiss the
claims asserted against our Operating Partnership.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.28 Indenture of Suburban Propane Partners, L.P. and Suburban Energy
Finance Corp. for the 6.875% Senior Notes due 2013 dated as of
December 23, 2003.
31.1 Certification of the President and 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 President and 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.
(b) The Partnership filed the following Reports on Form 8-K with the Securities
and Exchange Commission during the three months ended December 27, 2003:
On October 14, 2003, the Partnership filed the unaudited balance sheets of
the General Partner, as of June 28, 2003 and September 28, 2002, as an
exhibit to a Current Report on Form 8-K.
On November 12, 2003, the Partnership filed a press release announcing that
its Operating Partnership, Suburban Propane, L.P., had entered into an
Asset Purchase Agreement to acquire substantially all of the assets of
Agway Energy, as an exhibit to a Current Report on Form 8-K.
On November 12, 2003, the Partnership filed a press release announcing the
executive appointments of Robert M. Plante and Janice G. Meola, as an
exhibit to a Current Report on Form 8-K.
On December 4, 2003, the Partnership filed a press release announcing the
Partnership's intention to increase its quarterly distribution to $0.60 per
Common Unit, payable in May 2004, contingent upon closing of the Agway
transaction, as an exhibit to a Current Report on Form 8-K.
On December 5, 2003, the Partnership filed the combined financial
statements of Agway Energy for the years ended June 30, 2003, 2002 and 2001
and the unaudited combined financial statements of Suburban Propane
24
Partners, L.P. and Agway Energy as of and for the year ended September 27,
2003, as an exhibit to a Current Report on Form 8-K.
On December 8, 2003, the Partnership filed two press releases announcing
the Partnership's intention to make a public offering of 2,600,000 Common
Units and announcing the Partnership's intention to offer $150,000,000 of
senior unsecured notes, as exhibits to a Current Report on Form 8-K.
On December 12, 2003, the Partnership filed certain exhibits to its shelf
registration statement on Form S-3, as exhibits to a Current Report on Form
8-K.
On December 19, 2003, the Partnership filed press releases announcing that
the Partnership had priced $175 million aggregate principal amount of
6.875% senior unsecured notes, that the underwriters had exercised their
over-allotment option to purchase from the Partnership an additional 39,000
Common Units and that the United States Bankruptcy Court for the Northern
District of New York had approved the bid of its operating partnership,
Suburban Propane, L.P. to acquire substantially all of the assets of Agway
Energy.
Other items under Part II are not applicable.
25
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 10, 2004 /s/ ROBERT M. PLANTE
- ----------------- --------------------
Date Robert M. Plante
Vice President and Chief Financial Officer
February 10, 2004 /s/ MICHAEL A. STIVALA
- ----------------- ----------------------
Date Michael A. Stivala
Controller (Principal Accounting Officer)
26