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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 June 29, 2002
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 [ ]
As of August 9, 2002, 24,631,287 Common Units were 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)
Consolidated Balance Sheets as of June 29, 2002 and
September 29, 2001.......................................... 1
Consolidated Statements of Operations for the three months
ended June 29, 2002 and June 30, 2001....................... 2
Consolidated Statements of Operations for the nine months
ended June 29, 2002 and June 30, 2001....................... 3
Consolidated Statements of Cash Flows for the nine months
ended June 29, 2002 and June 30, 2001....................... 4
Consolidated Statement of Partners' Capital for the nine
months ended June 29, 2002.................................. 5
Notes to Consolidated Financial Statements.................. 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS............... 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK................................................. 19
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................ 21
SIGNATURES........................................................... 22
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
- -----------------------------------------------
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS WITHIN
THE MEANING OF SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
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, STRATEGY 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;
o FLUCTUATIONS IN THE UNIT COST OF PROPANE;
o THE ABILITY OF THE PARTNERSHIP TO COMPETE WITH OTHER SUPPLIERS OF PROPANE AND
OTHER ENERGY SOURCES;
o THE ABILITY OF THE PARTNERSHIP TO RETAIN CUSTOMERS;
o THE IMPACT OF ENERGY EFFICIENCY AND TECHNOLOGY ADVANCES ON THE DEMAND FOR
PROPANE;
o THE ABILITY OF MANAGEMENT TO CONTINUE TO CONTROL EXPENSES;
o THE IMPACT OF 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 LINES
OF BUSINESS AND TO INTEGRATE ACQUIRED BUSINESSES SUCCESSFULLY.
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 SUCH CAUTIONARY STATEMENTS. SOME OF THESE CAUTIONARY STATEMENTS ARE
DISCUSSED IN MORE DETAIL IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" IN THIS QUARTERLY REPORT. READERS ARE
CAUTIONED NOT TO PLACE UNDUE RELIANCE ON FORWARD-LOOKING OR CAUTIONARY
STATEMENTS, WHICH REFLECT MANAGEMENT'S OPINIONS ONLY AS OF THE DATE HEREOF. 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 BEHALF OF THE PARTNERSHIP
ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS IN THIS
QUARTERLY REPORT. READERS ARE ADVISED TO CONSULT ANY FURTHER DISCLOSURE THE
COMPANY MAY MAKE ON RELATED SUBJECTS IN SUBSEQUENT 10-Q, 8-K AND 10-K REPORTS TO
THE SECURITIES AND EXCHANGE COMMISSION.
SUBURBAN PROPANE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
JUNE 29, SEPTEMBER 29,
2002 2001
---------- -------------
ASSETS
Current assets:
Cash and cash equivalents ................................ $ 56,803 $ 36,494
Accounts receivable, less allowance for doubtful accounts
of $2,564 and $3,992, respectively .................... 41,219 42,702
Inventories .............................................. 39,215 41,891
Prepaid expenses and other current assets ................ 6,577 3,252
--------- ---------
Total current assets ............................. 143,814 124,339
Property, plant and equipment, net ........................... 333,877 344,374
Goodwill, net ................................................ 243,260 243,789
Other intangible assets, net ................................. 1,595 1,990
Other assets ................................................. 7,767 8,514
--------- ---------
Total assets .................................... $ 730,313 $ 723,006
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable ......................................... $ 31,985 $ 38,685
Accrued employment and benefit costs ..................... 19,665 29,948
Current portion of long-term borrowings .................. 46,000 42,500
Accrued insurance ........................................ 8,460 7,860
Customer deposits and advances ........................... 13,867 23,217
Accrued interest ......................................... 16,217 8,318
Other current liabilities ................................ 7,094 11,575
--------- ---------
Total current liabilities ...................... 143,288 162,103
Long-term borrowings ......................................... 426,332 430,270
Postretirement benefits obligation ........................... 34,216 34,521
Accrued insurance ............................................ 17,168 17,881
Accrued pension liability .................................... 15,768 13,703
Other liabilities ............................................ 5,098 5,579
--------- ---------
Total liabilities ............................. 641,870 664,057
--------- ---------
Commitments and contingencies
Partners' capital:
Common Unitholders (24,631 units issued and outstanding) 135,686 105,549
General Partner ........................................ 2,413 1,888
Deferred compensation .................................. (11,567) (11,567)
Common Units held in trust, at cost .................... 11,567 11,567
Unearned compensation .................................. (2,312) (1,211)
Accumulated other comprehensive (loss) ................. (47,344) (47,277)
--------- ---------
Total partners' capital ...................... 88,443 58,949
--------- ---------
Total liabilities and partners' capital ...... $ 730,313 $ 723,006
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
SUBURBAN PROPANE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED
----------------------
June 29, June 30,
2002 2001
--------- ---------
Revenues
Propane ................................................... $ 115,571 $ 124,370
Other ..................................................... 22,064 20,700
--------- ---------
137,635 145,070
Costs and expenses
Cost of products sold ..................................... 64,444 70,849
Operating ................................................. 60,589 65,167
General and administrative ................................ 8,053 5,119
Depreciation and amortization ............................. 7,377 9,477
--------- ---------
140,463 150,612
(Loss) before interest expense and provision for income taxes (2,828) (5,542)
Interest expense, net ....................................... 8,010 8,912
--------- ---------
(Loss) before provision for income taxes .................... (10,838) (14,454)
Provision for income taxes .................................. 190 105
--------- ---------
Net (loss) .................................................. $ (11,028) $ (14,559)
========= =========
General Partner's interest in net (loss) .................... $ (281) $ (275)
--------- ---------
Limited Partners' interest in net (loss) .................... $ (10,747) $ (14,284)
========= =========
Basic net (loss) per unit ................................... $ (0.44) $ (0.58)
--------- ---------
Weighted average number of units outstanding - basic ........ 24,631 24,631
--------- ---------
Diluted net (loss) per unit ................................. $ (0.44) $ (0.58)
--------- ---------
Weighted average number of units outstanding - diluted ...... 24,631 24,631
--------- ---------
The accompanying notes are an integral part of these consolidated financial
statements.
SUBURBAN PROPANE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
(UNAUDITED)
NINE MONTHS ENDED
----------------------
June 29, June 30,
2002 2001
--------- ---------
Revenues
Propane ................................................... $ 482,166 $ 725,556
Other ..................................................... 73,220 70,335
--------- ---------
555,386 795,891
Costs and expenses
Cost of products sold ..................................... 241,033 441,136
Operating ................................................. 177,996 198,343
General and administrative ................................ 23,369 22,561
Depreciation and amortization ............................. 22,369 29,082
Gain on sale of storage facility .......................... (6,768) --
--------- ---------
457,999 691,122
Income before interest expense and provision for income taxes 97,387 104,769
Interest expense, net ....................................... 25,383 29,165
--------- ---------
Income before provision for income taxes .................... 72,004 75,604
Provision for income taxes .................................. 518 270
--------- ---------
Net income .................................................. $ 71,486 $ 75,334
========= =========
General Partner's interest in net income .................... $ 1,482 $ 1,460
--------- ---------
Limited Partners' interest in net income .................... $ 70,004 $ 73,874
========= =========
Basic net income per unit ................................... $ 2.84 $ 3.02
--------- ---------
Weighted average number of units outstanding - basic ........ 24,631 24,475
--------- ---------
Diluted net income per unit ................................. $ 2.84 $ 3.02
--------- ---------
Weighted average number of units outstanding - diluted ...... 24,665 24,487
--------- ---------
The accompanying notes are an integral part of these consolidated financial
statements.
SUBURBAN PROPANE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
---------------------
June 29, June 30,
2002 2001
--------- ---------
Cash flows from operating activities:
Net income ............................................... $ 71,486 $ 75,334
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation ........................................ 21,002 21,411
Amortization ........................................ 1,367 7,671
(Gain) on disposal of property, plant and
equipment, net .................................... (213) (3,297)
(Gain) on sale of storage facility .................. (6,768) --
Changes in assets and liabilities, net of dispositions:
Decrease in accounts receivable ..................... 1,418 4,258
Decrease (increase) in inventories .................. 2,554 (234)
(Increase) in prepaid expenses and
other current assets .............................. (3,315) (266)
(Decrease) in accounts payable ...................... (6,289) (19,817)
(Decrease) increase in accrued employment
and benefit costs ................................. (9,686) 7,742
Increase in accrued interest ........................ 7,899 8,253
(Decrease) in other accrued liabilities ............. (13,771) (15,807)
Net change in other noncurrent assets and liabilities 344 (1,204)
-------- --------
Net cash provided by operating activities ...... 66,028 84,044
-------- --------
Cash flows from investing activities:
Capital expenditures .................................... (13,161) (16,087)
Proceeds from sale of property, plant and equipment, net 9,964 4,029
-------- --------
Net cash (used in) investing activities ........ (3,197) (12,058)
-------- --------
Cash flows from financing activities:
Long-term debt (repayments), net ........................ -- (44,397)
Short-term debt (repayments), net ....................... -- (6,500)
Credit agreement expenses ............................... -- (730)
Net proceeds from public offering ....................... -- 47,079
Partnership distributions ............................... (42,522) (40,696)
-------- --------
Net cash (used in) financing activities ........ (42,522) (45,244)
-------- --------
Net increase in cash and cash equivalents ..................... 20,309 26,742
Cash and cash equivalents at beginning of period .............. 36,494 11,645
-------- --------
Cash and cash equivalents at end of period .................... $ 56,803 $ 38,387
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest .................................... $ 17,824 $ 21,010
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
SUBURBAN PROPANE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
(IN THOUSANDS)
(UNAUDITED)
Accumulated
Common Other
Number of Common General Deferred Units in Unearned Comprehensive
Common Units Unitholders Partner Compensation Trust Compensation (Loss)
------------ ----------- ------- ------------ -------- ------------ -------------
Balance at September 29, 2001.... 24,631 $ 105,549 $1,888 ($11,567) $11,567 ($1,211) ($47,277)
Net income........................ 70,004 1,482
Other comprehensive loss:
Net unrealized losses on cash
flow hedges................... (67)
Comprehensive income..............
Partnership distributions......... (41,565) (957)
Grants issued under Restricted
Unit Plan, net of forfeitures... 1,698 (1,698)
Amortization of Compensation
Deferral Plan................... 161
Amortization of Restricted
Unit Plan, net of forfeitures... 436
------------ ----------- ------- ------------ -------- ------------ -------------
Balance at June 29, 2002.......... 24,631 $ 135,686 $2,413 ($11,567) $11,567 ($2,312) ($47,344)
============ =========== ======= ============ ======== ============ =============
Total
Partners' Comprehensive
Capital Income
-------- -------------
Balance at September 29, 2001.... $58,949
Net income........................ 71,486 $71,486
Other comprehensive loss:
Net unrealized losses on cash
flow hedges................... (67) (67)
------------
Comprehensive income.............. $71,419
============
Partnership distributions......... (42,522)
Grants issued under Restricted
Unit Plan, net of forfeitures... -
Amortization of Compensation
Deferral Plan................... 161
Amortization of Restricted
Unit Plan, net of forfeitures... 436
--------
Balance at June 29, 2002.......... $88,443
========
The accompanying notes are an integral part of these consolidated financial
statements.
SUBURBAN PROPANE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO 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 partners
and its indirect subsidiaries. All significant intercompany transactions and
accounts have been eliminated. The accompanying 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 29, 2001, 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 is exposed to the
impact of market fluctuations in the commodity price of propane. The Partnership
routinely uses commodity futures, forward and option contracts to hedge its
commodity price risk and 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. For derivative instruments designated as 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 accumulated other comprehensive
income (loss) ("OCI") to the extent effective and reclassified into cost of
products sold during the same period in which the hedged item affects earnings.
The mark-to-market gains or losses on ineffective portions of hedges are
recognized in 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.
Prior to March 31, 2002, the beginning of the Partnership's third fiscal
quarter, the Partnership determined that its derivative instruments did not
qualify as hedges and, as such, the changes in fair values were recorded in
income. Beginning with contracts entered into subsequent to March 31, 2002, a
portion of the derivative instruments entered into by the Partnership have been
designated and qualify as cash flow hedges. For the three months ended June 29,
2002 and June 30, 2001, operating expenses include unrealized losses in the
amount of $969 and $5,068, respectively, attributable to the change in fair
value of derivative instruments not designated as hedges. Operating expenses for
the nine months ended June 29, 2002 include unrealized gains of $5,116
attributable to the mark-to-market adjustment on derivative instruments not
designated as hedges, compared to unrealized losses of $3,351 for the nine
months ended June 30, 2001. At June 29, 2002, unrealized losses on derivative
instruments designated as cash flow hedges in the amount of $67 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.
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. Significant estimates have been made by management in the
areas of insurance and litigation reserves, 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.
RECLASSIFICATIONS. Certain prior period amounts have been reclassified to
conform with the current period presentation.
2. INVENTORIES
-----------
Inventories are stated at the lower of cost or market. Cost is determined using
a weighted average method for propane and a standard cost basis for appliances,
which approximates average cost. Inventories consist of the following:
JUNE 29, SEPTEMBER 29,
2002 2001
------------- -------------
Propane $30,656 $33,080
Appliances 8,559 8,811
------------- -------------
$39,215 $41,891
============= =============
3. NET (LOSS) INCOME PER UNIT
--------------------------
Basic net (loss) income per limited partner unit is computed by dividing net
(loss) income, after deducting the General Partner's approximate 2% interest, by
the weighted average number of outstanding Common Units. Diluted net (loss)
income per limited partner unit is computed by dividing net (loss) income, after
deducting the General Partner's approximate 2% interest, by the weighted average
number of outstanding Common Units and time vested Restricted Units granted
under the 2000 Restricted Unit Plan. In computing diluted net (loss) income per
unit, weighted average units outstanding used to compute basic net (loss) income
per unit were increased by 33,533 units and 12,164 units for the nine months
ended June 29, 2002 and June 30, 2001, respectively, to reflect the potential
dilutive effect of the time vested Restricted Units outstanding using the
treasury stock method. Diluted net (loss) income for the three months ended June
29, 2002 and June 30, 2001 does not include 36,012 and 15,956 Restricted Units,
respectively, as their effect would be anti-dilutive.
4. ADOPTION OF NEW ACCOUNTING STANDARD
-----------------------------------
Effective September 30, 2001, the beginning of the Partnership's 2002 fiscal
year, the Partnership elected to early adopt the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). SFAS 142 modifies the financial accounting and reporting
for goodwill and other intangible assets, including the requirement that
goodwill and certain intangible assets no longer be amortized. This new standard
also requires a transitional impairment review for goodwill, as well as an
annual impairment review, to be performed on a reporting unit basis. As a result
of the adoption of SFAS 142, amortization expense for the three and nine months
ended June 29, 2002 decreased by $1,854 and $5,562, respectively, compared to
the three and nine months ended June 30, 2001, respectively, due to the lack of
amortization expense related to goodwill. Aside from this change in accounting
for goodwill, no other change in accounting for intangible assets was required
as a result of the adoption of SFAS 142 based on the nature of the Partnership's
intangible assets. In accordance with SFAS 142, the Partnership completed its
transitional impairment review and, as the fair values of identified reporting
units exceed the respective carrying values, goodwill is not considered impaired
as of the date of adoption of SFAS 142.
The following table reflects the effect of the adoption of SFAS 142 on net
(loss) income and net (loss) income per unit as if SFAS 142 had been in effect
for the periods presented:
Three Months Ended Nine Months Ended
------------------------ ------------------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net (loss) income:
As reported ............................. $ (11,028) $ (14,559) $ 71,486 $ 75,334
Goodwill amortization ................... -- 1,854 -- 5,562
----------- ----------- ----------- -----------
As adjusted ............................. $ (11,028) $(12,705) $ 71,486 $ 80,896
=========== =========== =========== ===========
Basic and diluted net (loss) income per unit:
As reported ............................. $ (0.44) $ (0.58) $ 2.84 $ 3.02
Goodwill amortization ................... -- 0.07 -- 0.22
----------- ----------- ----------- -----------
As adjusted ............................. $ (0.44) $ (0.51) $ 2.84 $ 3.24
=========== =========== =========== ===========
Other intangible assets at June 29, 2002 and September 29, 2001 consist
primarily of non-compete agreements with a gross carrying amount of $4,290 and
$4,540, respectively, and accumulated amortization of $2,695 and $2,550,
respectively. These non-compete agreements are amortized under the straight-line
method over the periods of the agreements, ending periodically between fiscal
years 2002 and 2011. Aggregate amortization expense related to other intangible
assets for the three and nine months ended June 29, 2002 was $125 and $377,
respectively, and for the three and nine months ended June 30, 2001 was $140 and
$433, respectively.
Aggregate amortization expense related to other intangible assets for each of
the five succeeding fiscal years as of June 29, 2002 is as follows:
FISCAL YEAR
-----------
Remainder of 2002 $ 120
2003 426
2004 360
2005 303
2006 232
2007 75
For the nine months ended June 29, 2002, the net carrying amount of goodwill
decreased by $529 as a result of the sale of certain assets during the period.
5. DISTRIBUTIONS OF AVAILABLE CASH
-------------------------------
The Partnership makes distributions to its partners approximately 45 days after
the end of each fiscal quarter in an aggregate amount equal to its Available
Cash for each respective quarter. Available Cash, as defined in the Second
Amended and Restated Partnership Agreement, generally means all cash on hand at
the end of the fiscal quarter less the amount of cash reserves established by
the Board of Supervisors in its reasonable discretion for future cash
requirements of the Partnership.
On May 8, 2002, the Partnership declared a quarterly distribution of $.575 per
Common Unit, or $2.30 on an annualized basis, for the third quarter of fiscal
2002 payable on August 13, 2002 to holders of record on August 6, 2002. This
quarterly distribution represents a $.0125 per Common Unit, or $.05 per Common
Unit annualized, increase over the distribution declared and paid in the prior
three quarters and includes incentive distribution rights payable to the General
Partner to the extent the quarterly distribution exceeds $.55 per Common Unit.
6. LONG-TERM BORROWINGS
--------------------
Long-term borrowings consist of the following:
June 29, September 29,
2002 2001
------------------- -------------------
7.54% Senior Notes due June 30, 2011 ......... $382,500 $425,000
7.37% Senior Notes due June 30, 2012 ......... 42,500 --
Note payable, 8%, due in annual installments
through 2006 ............................ 1,698 2,048
Amounts outstanding under Acquisition Facility
of Revolving Credit Agreement ........... 46,000 46,000
Other long-term liabilities .................. 72 129
------------------- -------------------
472,770 473,177
Less: current portion ........................ 46,438 42,907
------------------- -------------------
$426,332 $430,270
=================== ===================
On March 5, 1996, the Operating Partnership, pursuant to a Senior Note
Agreement, issued $425,000 of Senior Notes with an annual interest rate of 7.54%
(the "1996 Senior Note Agreement"). 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 Revolving
Credit Agreement. The Senior Notes will mature June 30, 2011, and require
semiannual interest payments which commenced June 30, 1996. Under the terms of
the 1996 Senior Note Agreement, the Operating Partnership is obligated to pay
the principal on the Senior Notes in equal annual payments of $42,500 starting
July 1, 2002. Pursuant to the Partnership's intention to refinance the first
annual principal payment of $42,500, the Partnership executed on April 19, 2002
a Note Purchase Agreement for the private placement of 10-year 7.37% Senior
Notes due June, 2012 (the "2002 Senior Note Agreement"). On July 1, 2002, the
Partnership received $42,500 from the issuance of the Senior Notes under the
2002 Senior Note Agreement 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 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 Credit Agreement.
The Partnership's Revolving Credit Agreement, as amended on January 29, 2001,
provides a $75,000 working capital facility and a $50,000 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 June 29, 2002 and September 29, 2001, $46,000 was
outstanding under the acquisition facility of the Revolving Credit Agreement and
there were no borrowings under the working capital facility. The Revolving
Credit Agreement matures on May 31, 2003 and, as such, the $46,000 outstanding
balance has been classified as a current liability at June 29, 2002. The
Partnership has begun initial discussions and negotiations to extend, or
otherwise restructure, the Revolving Credit Agreement on a long-term basis which
is currently expected to be completed by the third quarter of fiscal 2003.
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, (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.
7. 2000 RESTRICTED UNIT PLAN
-------------------------
During fiscal 2002, the Partnership awarded 66,298 Restricted Units under the
2000 Restricted Unit Plan at an aggregate value of $1,765 to employees of the
Partnership. 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.
The 2000 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 Unit 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 June 29, 2002 and September 29, 2001, the Partnership had
accrued insurance liabilities of $25,628 and $25,741, respectively, representing
the total estimated losses under these self-insurance programs. These
liabilities represent the gross estimated losses as no claims or lawsuits,
individually or in the aggregate, were estimated to exceed the Partnership's
deductibles on its insurance policies.
The Partnership is also involved in various legal actions that 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.
9. RECENTLY ISSUED ACCOUNTING STANDARDS
------------------------------------
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
143, "Accounting for Asset Retirement Obligations" ("SFAS 143"), which requires
that the fair value of a liability for an asset retirement obligation be
recognized in the period in which it is incurred and the associated asset
retirement costs be capitalized as part of the carrying amount of the long-lived
asset. Accretion expense and depreciation expense related to the liability and
capitalized asset retirement costs, respectively, would be recorded in
subsequent periods. SFAS 143 is effective for fiscal years beginning after June
15, 2002. The Partnership is currently in the process of evaluating the impact
of SFAS 143 and does not anticipate that adoption of this standard will have a
material impact, if any, on its consolidated financial position, results of
operations or cash flows.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 applies to all long-lived
assets, including discontinued operations, and provides guidance on the
measurement and recognition of impairment charges for assets to be held and
used, assets to be abandoned and assets to be disposed of by sale. SFAS 144
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of." SFAS 144 is effective for fiscal years
beginning after December 15, 2001. The provisions of this standard are to be
applied prospectively. The Partnership is currently in the process of evaluating
the impact of SFAS 144 and does not anticipate that adoption of this standard
will have a material impact on its consolidated financial position, results of
operations or cash flows.
10. SALE OF STORAGE FACILITY
------------------------
On January 31, 2002, the Partnership sold its 170 million gallon propane storage
facility in Hattiesburg, Mississippi, which was considered a non-strategic
asset, for net cash proceeds of approximately $8,000, resulting in a gain on
sale of approximately $6,768.
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 and nine months ended June
29, 2002. 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 29, 2001.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
- -----------------------------------------------
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED, 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,
STRATEGY 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;
o FLUCTUATIONS IN THE UNIT COST OF PROPANE;
o THE ABILITY OF THE PARTNERSHIP TO COMPETE WITH OTHER SUPPLIERS OF PROPANE AND
OTHER ENERGY SOURCES;
o THE ABILITY OF THE PARTNERSHIP TO RETAIN CUSTOMERS;
o THE IMPACT OF ENERGY EFFICIENCY AND TECHNOLOGY ADVANCES ON THE DEMAND FOR
PROPANE;
o THE ABILITY OF MANAGEMENT TO CONTINUE TO CONTROL EXPENSES;
o THE IMPACT OF 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 LINES
OF BUSINESS AND TO INTEGRATE ACQUIRED BUSINESSES SUCCESSFULLY.
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 SUCH CAUTIONARY STATEMENTS. SOME OF THESE CAUTIONARY STATEMENTS ARE
DISCUSSED IN MORE DETAIL IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" IN THIS QUARTERLY REPORT. READERS ARE
CAUTIONED NOT TO PLACE UNDUE RELIANCE ON FORWARD-LOOKING OR CAUTIONARY
STATEMENTS, WHICH REFLECT MANAGEMENT'S OPINIONS ONLY AS OF THE DATE HEREOF. 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 BEHALF OF THE PARTNERSHIP
ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS IN THIS
QUARTERLY REPORT. READERS ARE ADVISED TO CONSULT ANY FURTHER DISCLOSURE THE
COMPANY MAY MAKE ON RELATED SUBJECTS IN SUBSEQUENT 10-Q, 8-K AND 10-K REPORTS TO
THE SECURITIES AND EXCHANGE COMMISSION.
PRODUCT COSTS
The retail propane business is a "margin-based" business where the level of
profitability is largely dependent on the difference between retail sales price
and product cost. The unit cost of propane is subject to volatile changes as a
result of product supply or other market conditions. Propane unit cost changes
can occur rapidly over a short period of time and can impact retail margins.
There is no assurance that the Partnership will be able to pass on product cost
increases fully, particularly when product costs increase rapidly.
SEASONALITY
The retail propane distribution business is seasonal because of propane's
primary use for heating in residential and commercial buildings. Historically,
approximately two-thirds of the Partnership's retail propane volume is sold
during the six month peak heating season of October through March. Consequently,
sales and operating profits are concentrated in the Partnership's first and
second fiscal quarters. Cash flows from operations, therefore, are greatest
during the second and third fiscal quarters when customers pay for propane
purchased during the winter heating season. To the extent necessary, the
Partnership will reserve cash from the second and third quarters for
distribution to Unitholders in the first and fourth fiscal quarters.
WEATHER
Weather conditions have a significant impact on the demand for propane for
both heating and agricultural purposes. Many customers of the Partnership rely
heavily on propane as a heating fuel. Accordingly, the volume of propane sold is
directly affected by the severity of the winter weather which can vary
substantially from year to year.
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED JUNE 29, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
- -----------------------------------------------------------------------------
REVENUES. Revenues decreased 5.2%, or $7.5 million, to $137.6 million for
the three months ended June 29, 2002 compared to $145.1 million for the three
months ended June 30, 2001. This decrease is principally due to a decrease in
average selling prices, coupled with a decrease in retail gallons sold. Average
selling prices declined as a result of a significant decline in the commodity
price of propane in fiscal 2002 compared to the prior year quarter. Average
propane selling prices were approximately 13.1% lower during the three months
ended June 29, 2002 as compared to the prior year quarter. The decrease in
volume was primarily attributable to the residual effect of record warm weather
experienced throughout the peak heating months of October through March, as well
as, to a lesser extent, the impact of the prolonged economic recession on
customer buying habits.
Retail gallons sold decreased 3.8%, or 3.4 million gallons, to 86.7 million
gallons, compared to 90.1 million gallons in the prior year quarter. The
majority of the shortfall in retail gallons compared to the prior year quarter
was experienced in April 2002, the first month of our fiscal third quarter, as a
result of the continued unseasonably warm weather in the early spring months.
Temperatures nationwide, as reported by the National Oceanic and Atmospheric
Administration ("NOAA"), were 11% warmer than normal during the month of April
2002 and 2% warmer than the month of April 2001.
Revenue from other sources; including sales of appliances, related parts
and services, of $22.1 million for the three months ended June 29, 2002
increased $1.4 million, or 6.8%, compared to other revenue in the prior year
quarter of $20.7 million.
OPERATING EXPENSES. Operating expenses decreased 7.1%, or $4.6 million, to
$60.6 million for the three months ended June 29, 2002 compared to $65.2 million
for the three months ended June 30, 2001. Operating expenses in the third
quarter of fiscal 2002 include a $1.0 million unrealized loss representing the
net change in fair values of derivative instruments during the quarter, compared
to a $5.1 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). Excluding the
impact of changes in the fair value of derivative instruments on both the
current and prior year quarter, operating expenses decreased $0.5 million
primarily resulting from lower compensation costs and reduced levels of bad
debt. The lower compensation costs were slightly offset by an increase in
medical costs compared to the prior year quarter.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses of
$8.1 million for the three months ended June 29, 2002 were $3.0 million, or
58.8%, higher than the prior year quarter of $5.1 million. The increase was
primarily attributable to gains realized in the prior year quarter in connection
with the sale of certain non-strategic assets, as well as the impact of slightly
higher benefit related costs in the current year quarter.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
decreased 22.1%, or $2.1 million, to $7.4 million compared to $9.5 million in
the prior year quarter as a result of our decision to early adopt Statement of
Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142") effective September 30, 2001 (the beginning of fiscal
2002), which eliminates the requirement to amortize goodwill and certain
intangible assets. If SFAS 142 had been in effect last year, fiscal 2001 third
quarter net (loss) would have improved by $1.9 million. Refer to "Adoption of
New Accounting Standard" below for further information on the adoption of SFAS
142.
(LOSS) BEFORE INTEREST EXPENSE AND INCOME TAXES AND EBITDA. (Loss) before
interest expense and income taxes improved $2.7 million to $(2.8) million in the
three months ended June 29, 2002 compared to $(5.5) million in the prior year
quarter. Earnings before interest, taxes, depreciation and amortization
("EBITDA") amounted to $4.5 million in the three months ended June 29, 2002,
compared to $3.9 million for the prior year quarter, an increase of $0.6
million, or 15.4%. The improvement in (loss) before interest expense and income
taxes and in EBITDA over the prior year quarter includes the impact of lower
unrealized losses on derivative instruments and lower operating expenses
described above; offset by the 3.8% lower retail volumes sold and the impact on
prior year earnings of gains realized on the sale of non-strategic assets.
EBITDA should not be considered as an alternative to net income (as an
indicator of operating performance) or as an alternative to cash flow (as a
measure of liquidity or ability to service debt obligations) and is not in
accordance with or superior to generally accepted accounting principles, but
provides additional information for evaluating our ability to distribute our
quarterly distributions. Because EBITDA excludes some, but not all, items that
affect net income and this measure may vary among companies, the EBITDA data
presented above may not be comparable to similarly titled measures of other
companies.
INTEREST EXPENSE. Net interest expense decreased $0.9 million, or 10.1%, to
$8.0 million for the three months ended June 29, 2002 compared to $8.9 million
in the prior year quarter. This decrease is primarily attributable to lower
average interest rates on outstanding borrowings under our Revolving Credit
Agreement.
NINE MONTHS ENDED JUNE 29, 2002 COMPARED TO NINE MONTHS ENDED JUNE 30, 2001
- ---------------------------------------------------------------------------
REVENUES. Revenues for the nine months ended June 29, 2002 of $555.4
million decreased $240.5 million compared to $795.9 million for the nine months
ended June 30, 2001. This decrease is principally due to a decrease in retail
volumes sold as compared to the same period in the prior fiscal year, as well as
a decrease in average selling prices. The decrease in volumes is primarily
attributable to the significantly warmer weather conditions through the first
six months of fiscal 2002 compared to the comparable period in the prior year
which carried over into the early part of the third quarter of fiscal 2002.
Propane selling prices averaged 20.1% lower during the nine months ended June
29, 2002 compared to the prior year period, as a result of lower costs of
propane supply.
Retail gallons sold decreased 59.8 million, or 13.6%, to 379.3 million
gallons for the nine months ended June 29, 2002, compared to 439.1 million
gallons in the prior year period. Temperatures nationwide were 12% warmer than
normal during the nine month period as compared to 2% colder than normal in the
comparable period in the prior year, or 14% warmer conditions year-over-year, as
reported by the NOAA. The wide swing in temperatures was particularly felt
during the peak heating months of November 2001 through February 2002 and the
residual impact of prolonged warm temperatures was experienced into the early
months of spring.
Revenue from other sources; including sales of appliances, related parts
and services, of $73.2 million for the nine months ended June 29, 2002 increased
$2.9 million, or 4.1%, compared to other revenue in the prior year quarter of
$70.3 million.
OPERATING EXPENSES. Operating expenses decreased 10.2%, or $20.3 million,
to $178.0 million for the nine months ended June 29, 2002 compared to $198.3
million for the nine months ended June 30, 2001. Operating expenses in the first
nine months of fiscal 2002 include a $5.1 million unrealized gain attributable
to the mark-to-market adjustment on derivative instruments, compared to a $3.4
million unrealized loss in the prior year period (see Item 3 Quantitative and
Qualitative Disclosures About Market Risk for information on our policies
regarding the accounting for derivative instruments). Excluding the impact of
the mark-to-market adjustments, the decrease in operating expenses is
principally attributable to our ability to reduce costs amidst declining volumes
resulting from management's ongoing initiatives to shift costs from fixed to
variable, primarily in the areas of employee compensation and benefits. In
addition, we experienced lower bad debt expense during fiscal 2002 compared to
the prior year period, as well as lower fuel costs for operating our fleet
attributable to lower natural gas prices in fiscal 2002.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 3.5%, or $0.8 million, to $23.4 million for the nine months ended June
29, 2002 compared to $22.6 million for the nine months ended June 30, 2001. The
increase is primarily attributable to the impact of lower payroll and benefit
costs, lower incentive compensation and lower professional services, offset by
the impact of higher gains realized on the sale of non-strategic assets in the
prior year compared to the current fiscal year-to-date period.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
decreased 23.0%, or $6.7 million, to $22.4 million for the nine months ended
June 29, 2002 compared to $29.1 million in the prior year period primarily
resulting from our decision in fiscal 2002 to early adopt SFAS 142. If SFAS 142
had been in effect last year, net income for the nine months ended June 30, 2001
would have increased by $5.6 million. Refer to "Adoption of New Accounting
Standard" below for further information on the adoption of SFAS 142.
GAIN ON SALE OF STORAGE FACILITY. On January 31, 2002, we sold our 170
million gallon propane storage facility in Hattiesburg, Mississippi, which was
considered a non-strategic asset, for net cash proceeds of $8.0 million,
resulting in a gain on sale of approximately $6.8 million.
INCOME BEFORE INTEREST EXPENSE AND INCOME TAXES AND EBITDA. Income before
interest expense and income taxes decreased $7.4 million to $97.4 million in the
nine months ended June 29, 2002 compared to $104.8 million for the prior year
period. EBITDA decreased $14.1 million, or 10.5%, to $119.8 million compared to
$133.9 million in the prior year period. The declines in income before interest
expense and income taxes and in EBITDA are primarily attributable to lower
retail volumes sold, partially offset by the impact of lower operating and
general and administrative expenses described above, the gain on the sale of our
Hattiesburg, Mississippi storage facility and the impact of the mark-to-market
adjustment on derivative instruments.
EBITDA should not be considered as an alternative to net income (as an
indicator of operating performance) or as an alternative to cash flow (as a
measure of liquidity or ability to service debt obligations) and is not in
accordance with or superior to generally accepted accounting principles but
provides additional information for evaluating our ability to distribute our
quarterly distributions. Because EBITDA excludes some, but not all, items that
affect net income and this measure may vary among companies, the EBITDA data
presented above may not be comparable to similarly titled measures of other
companies.
INTEREST EXPENSE. Net interest expense decreased $3.8 million, or 13.0%, to
$25.4 million for the nine months ended June 29, 2002 compared to $29.2 million
in the prior year period. This decrease is primarily attributable to reductions
in average amounts outstanding under our Revolving Credit Agreement, as well as
lower average interest rates. There were no outstanding borrowings under the
working capital facility of the Revolving Credit Agreement during the first six
months of fiscal 2002 compared to $26.0 million at the end of the first quarter
of fiscal 2001 and $7.3 million at the end of the second quarter of fiscal 2001.
LIQUIDITY AND CAPITAL RESOURCES
Due to the seasonal nature of the propane business, cash flows from
operating activities are greater during the winter and spring seasons as
customers pay for propane purchased during the heating season. For the nine
months ended June 29, 2002, net cash provided by operating activities was $66.0
million compared to cash provided by operating activities of $84.0 million for
the nine months ended June 30, 2001. The decrease of $18.0 million was primarily
due to $14.2 million lower net income, after adjusting for non-cash items in
both periods (depreciation, amortization and gains on disposal of assets), as
well as the impact of unfavorable changes in working capital in comparison to
the prior year period, primarily resulting from payments on employee benefits.
Net cash used in investing activities during the nine months ended June 29,
2002 consists of net proceeds from the sale of property, plant and equipment of
$10.0 million (including net cash proceeds of $8.0 million resulting from the
sale of our propane storage facility in Hattiesburg, Mississippi), offset by
capital expenditures of $13.2 million (including $9.8 million for maintenance
expenditures and $3.4 million to support the growth of operations). Net cash
used in investing activities was $12.1 million during the nine months ended June
30, 2001 consisting of capital expenditures of $16.1 million (including $4.5
million for maintenance expenditures and $11.6 million to support the growth of
operations), offset by net proceeds from the sale of property, plant and
equipment of $4.0 million.
Net cash used in financing activities for the nine months ended June 29,
2002 was $42.5 million, reflecting payment of our quarterly distributions of
$.5625 per Common Unit during each of the first three quarters of fiscal 2002.
Net cash used in financing activities for the nine months ended June 30, 2001
was $45.2 million, reflecting $40.7 million in quarterly distributions and $50.9
million of net repayments of amounts outstanding under the Revolving Credit
Agreement, partially offset by $47.1 million in net proceeds received from the
public offering of 2.4 million Common Units which was completed in November
2000.
On March 5, 1996, pursuant to a Senior Note Agreement, we issued $425.0
million of Senior Notes with an annual interest rate of 7.54% (the "1996 Senior
Note Agreement"). Our obligations under the 1996 Senior Note Agreement are
unsecured and rank on an equal and ratable basis with our obligations under the
Revolving Credit Agreement. The Senior Notes will mature June 30, 2011, and
require semiannual interest payments which commenced June 30, 1996. Under the
terms of the 1996 Senior Note Agreement, we are obligated to pay the principal
on the Senior Notes in equal annual payments of $42.5 million starting July 1,
2002. Pursuant to our intention to refinance the first annual principal payment
of $42.5 million, we executed on April 19, 2002 a Note Purchase Agreement for
the private placement of 10-year 7.37% Senior Notes due June, 2012 (the "2002
Senior Note Agreement"). On July 1, 2002, we received $42.5 million from the
issuance of the Senior Notes under the 2002 Senior Note Agreement and used the
funds to pay the first annual principal payment of $42.5 million due under the
1996 Senior Note Agreement. Our obligations under the 2002 Senior Note Agreement
are unsecured and rank on an equal and ratable basis with our obligations under
the 1996 Senior Note Agreement and the Revolving Credit Agreement.
Our Revolving Credit Agreement, as amended on January 29, 2001, provides a
$75.0 million working capital facility and a $50.0 million 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 June 29, 2002 and September 29, 2001, $46.0 million was
outstanding under the acquisition facility of the Revolving Credit Agreement and
there were no borrowings under the working capital facility. The Revolving
Credit Agreement matures on May 31, 2003 and, as such, the $46.0 million
outstanding balance has been classified as a current liability at June 29, 2002.
We have begun initial discussions and negotiations to extend, or otherwise
restructure, the Revolving Credit Agreement on a long-term basis which is
currently expected to be completed by the third quarter of fiscal 2003.
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, (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.
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. During each of the first three quarters of fiscal 2002, we made
distributions to our Common Unitholders of $.5625 per Common Unit. These
quarterly distributions include Incentive Distribution Rights ("IDRs") payable
to the General Partner to the extent the quarterly distribution exceeds $.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 the $.55 per Common Unit. With regard to the
first $.55 of the Common Unit distribution paid in each of the first three
quarters, 98.11% of the Available Cash was distributed to the Common Unitholders
and 1.89% was distributed to the General Partner. With regard to the balance of
$.0125 of the Common Unit distribution paid, 85% of the Available Cash was
distributed to the Common Unitholders and 15% was distributed to the General
Partner.
On May 8, 2002, we declared a $.05 annualized increase in our quarterly
distribution from $.5625 per Common Unit to $.575 per Common Unit, or $2.30 on
an annualized basis, for the third quarter of fiscal 2002 payable on August 13,
2002 to holders of record on August 6, 2002.
As discussed above, the results of operations for the first nine months of
fiscal 2002 were adversely impacted by unseasonably warm weather nationwide
throughout the peak heating season, as weather was 12% warmer than normal and
14% warmer than the prior year period. However, our ability to manage our cost
structure, coupled with our success in monetizing the Hattiesburg, Mississippi
storage facility during the second quarter of fiscal 2002, which was considered
a non-strategic asset, helped mitigate some of the negative impact that warmer
weather conditions may have had on our results of operations and cash flow. Even
with near record warm temperatures nationwide during the first six months of
fiscal 2002 and into the early months of spring, we effectively managed our cash
flow during the peak heating season without the need to utilize our working
capital facility under the Revolving Credit Agreement. While the remainder of
our fiscal year is typically less dependent on weather patterns, the seasonal
nature of the propane business is such that lower revenues and lower net income
is expected during the period from April through September of each year. Based
on our current estimate of our cash position, availability under the Revolving
Credit Agreement (unused borrowing capacity under the working capital facility
of $75.0 million at June 29, 2002) and expected cash from operating activities,
we expect to have sufficient funds to meet our current and future obligations.
LONG-TERM DEBT OBLIGATIONS AND OTHER COMMITMENTS
Long-term debt obligations and future minimum rental commitments under
noncancelable operating lease agreements as of June 29, 2002 are due as follows
(amounts in thousands):
REMAINDER FISCAL
OF FISCAL FISCAL FISCAL FISCAL 2006 AND
2002 2003 2004 2005 THEREAFTER TOTAL
---------- ---------- ----------- ---------- ---------- ----------
Long-term debt ..................... $ 4 $ 88,941 $ 42,911 $ 42,939 $297,975 $472,770
Operating leases ................... 5,798 20,497 16,272 12,187 21,580 76,334
---------- ---------- ----------- ---------- ---------- ----------
Total long-term debt obligations
and lease commitments ........ $ 5,802 $109,438 $ 59,183 $ 55,126 $319,555 $549,104
========== ========== =========== ========== ========== ==========
Additionally, we have standby letters of credit in the aggregate amount of
$29.8 million, in support of our casualty insurance coverage and certain lease
obligations, which expire on March 1, 2003.
RELATED PARTY TRANSACTION
The Partnership's general partner, Suburban Energy Services Group LLC (the
"General Partner"), acquired the general partner interests from a predecessor
general partner on May 26, 1999 for $6.0 million (the "GP Loan") which was
borrowed under a private placement with Mellon Bank N.A. ("Mellon"). As of June
29, 2002, the balance outstanding under the GP Loan was $0.1 million.
Upon the occurrence and continuance of an event of default, as defined in
the GP Loan, Mellon has the right to cause the Partnership to purchase the note
evidencing the GP Loan (the "GP Note"). The Partnership has agreed to maintain
borrowing availability under its Revolving Credit Agreement sufficient to enable
the Partnership to repurchase the GP Note in these circumstances. The GP Loan
will also cross-default to the obligations of the Partnership under its
Revolving Credit Agreement. Upon a GP Loan default, the Partnership also has the
right to purchase the GP Note from Mellon.
If the Partnership elects or is required to purchase the GP Note from
Mellon, the Partnership has the right, exercisable in its sole discretion
pursuant to the Compensation Deferral Plan established for the members of the
Successor General Partner, to cause up to all of the Common Units deposited in a
rabbi trust (amounting to $11.6 million as of June 29, 2002 and September 29,
2001) related to the Compensation Deferral Plan to be forfeited and cancelled
(and to cause all of the related distributions to be forfeited), regardless of
the amount paid by the Partnership to purchase the GP Note.
ADOPTION OF NEW ACCOUNTING STANDARD
Effective September 30, 2001, the beginning of our 2002 fiscal year, we
elected to early adopt the provisions of SFAS 142. SFAS 142 modifies the
financial accounting and reporting for goodwill and other intangible assets,
including the requirement that goodwill and certain intangible assets no longer
be amortized. This new standard also requires a transitional impairment review
for goodwill, as well as an annual impairment review, to be performed on a
reporting unit basis. As a result of the adoption of SFAS 142, amortization
expense for the three and nine months ended June 29, 2002 decreased by $1.9
million and $5.6 million, respectively, compared to the three and nine months
ended June 30, 2001, respectively, as a result of the lack of amortization
expense related to goodwill. Aside from this change in accounting for goodwill,
no other change in accounting for intangible assets was required as a result of
the adoption of SFAS 142 based on the nature of our intangible assets. In
accordance with SFAS 142, we completed a transitional impairment review and, as
the fair values of identified reporting units exceed the respective carrying
values, goodwill is not considered impaired as of the date of adoption of SFAS
142.
RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"), which
requires that the fair value of a liability for an asset retirement obligation
be recognized in the period in which it is incurred and the associated asset
retirement costs be capitalized as part of the carrying amount of the long-lived
asset. Accretion expense and depreciation expense related to the liability and
capitalized asset retirement costs, respectively, would be recorded in
subsequent periods. SFAS 143 is effective for fiscal years beginning after June
15, 2002. We are currently in the process of evaluating the impact of SFAS 143
and do not anticipate that adoption of this standard will have a material
impact, if any, on its consolidated financial position, results of operations or
cash flows.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 applies to
all long-lived assets, including discontinued operations, and provides guidance
on the measurement and recognition of impairment charges for assets to be held
and used, assets to be abandoned and assets to be disposed of by sale. SFAS 144
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of". SFAS 144 is effective for fiscal years
beginning after December 15, 2001. The provisions of this standard are to be
applied prospectively. We are currently in the process of evaluating the impact
of SFAS 144 and do not anticipate that adoption of this standard will have a
material impact on our consolidated financial position, results of operations or
cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of June 29, 2002, the Partnership was party to propane forward and
option contracts with various third parties and futures traded on the New York
Mercantile Exchange (the "NYMEX"). Futures and forward contracts require that
the Partnership sell or acquire propane at a fixed price at fixed future dates.
An option contract allows, but does not require, its holder to buy or sell
propane 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 propane to the respective party or are settled by the payment
of a net amount equal to the difference between the then current price of
propane and the fixed contract price. The contracts are entered into in
anticipation of market movements and to manage and hedge exposure to fluctuating
propane prices as well as to help ensure the availability of propane during
periods of high demand.
Market risks associated with the trading of futures, options and forward
contracts are monitored daily for compliance with the Partnership's 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
The Partnership is subject to commodity price risk to the extent that
propane 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. The Partnership is subject to credit risk with forward and option
contracts to the extent the counterparties do not perform. The Partnership
evaluates the financial condition of each counterparty with which it conducts
business and establishes credit limits to reduce exposure to credit risk of
non-performance.
SENSITIVITY ANALYSIS
In an effort to estimate the exposure of unfavorable market price
movements, a sensitivity analysis of open positions as of June 29, 2002 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 a potential loss in future earnings of $1.5 million
and $0.8 million as of June 29, 2002 and June 30, 2001, respectively. See also
Item 7A of the Partnership's Annual Report on Form 10-K for the fiscal year
ended September 29, 2001.
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.
DERIVATIVE INSTRUMENTS
The Partnership accounts for its 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. Prior to March 31, 2002, the beginning of our third fiscal quarter,
we determined that our derivative instruments did not qualify as hedges and, as
such, the changes in fair values were recorded in income. Beginning with
contracts entered into subsequent to March 31, 2002, a portion of the derivative
instruments entered into have been designated and qualify as cash flow hedges.
For derivative instruments designated as hedges, we formally assess, both at the
hedge contract's inception and on an ongoing basis, whether the hedge contract
is highly effective in offsetting changes in cash flows of hedged items. Changes
in the fair value of derivative instruments designated as cash flow hedges are
reported in accumulated other comprehensive income (loss) ("OCI") to the extent
effective and reclassified into cost of products sold during the same period in
which the hedged item affects earnings. The mark-to-market gains or losses on
ineffective portions of hedges are recognized in 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. Fair values for
forward and futures contracts are derived from quoted market prices for similar
instruments traded on the NYMEX.
At June 29, 2002, the fair value of derivative instruments described above
resulted in derivative assets of $0.8 million and derivative liabilities of $0.1
million. For the three months ended June 29, 2002 and June 30, 2001, operating
expenses include unrealized losses in the amount of $1.0 million and $5.1
million, respectively, attributable to the change in fair value of derivative
instruments not designated as hedges. Operating expenses for the nine months
ended June 29, 2002 include unrealized gains of $5.1 million attributable to the
mark-to-market adjustment on derivative instruments not designated as hedges,
compared to unrealized losses of $3.4 million for the nine months ended June 30,
2001. At June 29, 2002, unrealized losses on derivative instruments designated
as cash flow hedges in the amount of $0.1 million were included in OCI and are
expected to be recognized in earnings during the next 12 months as the hedged
transactions occur. However, due to the volatility of the commodities market,
the corresponding value in OCI is subject to change prior to its impact on
earnings.
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10(e) Note Purchase Agreement dated April 19, 2002 for the 7.37%
Senior Notes due June 30, 2012.
10(f) Subsidiary Guaranty Agreement dated July 1, 2002 provided by
certain subsidiaries of Suburban Propane, L.P.
10(g) Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
The Partnership furnished a Form 8-K to the Securities and Exchange
Commission on July 11, 2002 incorporating a press release announcing
the Partnership's Quarterly Earnings Conference Call.
Other items under Part II are not applicable.
SIGNATURES
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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.
AUGUST 13, 2002 /S/ ROBERT M. PLANTE
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Date Robert M. Plante
Vice President - Finance and Treasurer
(Principal Financial Officer)
AUGUST 13, 2002 /S/ MICHAEL A. STIVALA
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Date Michael A. Stivala
Controller
(Principal Accounting Officer)