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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 28, 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 [ ]
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 3, 2003, 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 December 28, 2002
and September 28, 2002.................................... 1
Consolidated Statements of Operations for the three months
ended December 28, 2002 and December 29, 2001............. 2
Consolidated Statements of Cash Flows for the three months
ended December 28, 2002 and December 29, 2001............. 3
Consolidated Statement of Partners' Capital for the three
months ended December 28, 2002............................ 4
Notes to Consolidated Financial Statements................ 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS............. 9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK............................................... 15
ITEM 4. CONTROLS AND PROCEDURES................................... 17
PART II
ITEM 1. LEGAL PROCEEDINGS........................................ 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K......................... 18
SIGNATURES......................................................... 19
CERTIFICATIONS..................................................... 20
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;
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 impact on propane prices and supply of the political and economic
instability of the oil producing nations and other general economic
conditions;
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
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,
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 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 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
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
December 28, September 28,
2002 2002
------------ -------------
ASSETS
Current assets:
Cash and cash equivalents .................................... $ 32,181 $ 40,955
Accounts receivable, less allowance for doubtful accounts
of $1,894 and $1,894, respectively ........................ 70,642 33,002
Inventories .................................................. 38,609 36,367
Prepaid expenses and other current assets .................... 4,734 6,465
--------- ---------
Total current assets ................................. 146,166 116,789
Property, plant and equipment, net ............................... 327,060 331,009
Goodwill, net .................................................... 243,260 243,260
Other intangible assets, net ..................................... 1,356 1,474
Other assets ..................................................... 8,028 7,614
--------- ---------
Total assets ........................................ $ 725,870 $ 700,146
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable ............................................. $ 40,936 $ 27,412
Accrued employment and benefit costs ......................... 18,698 21,430
Current portion of long-term borrowings ...................... 88,882 88,939
Accrued insurance ............................................ 8,620 8,670
Customer deposits and advances ............................... 21,916 26,125
Accrued interest ............................................. 16,694 8,666
Other current liabilities .................................... 7,402 6,303
--------- ---------
Total current liabilities .......................... 203,148 187,545
Long-term borrowings ............................................. 383,824 383,830
Postretirement benefits obligation ............................... 33,428 33,284
Accrued insurance ................................................ 18,338 18,299
Accrued pension liability ........................................ 54,168 53,164
Other liabilities ................................................ 4,795 4,738
--------- ---------
Total liabilities ................................. 697,701 680,860
--------- ---------
Commitments and contingencies
Partners' capital:
Common Unitholders (24,631 units issued and outstanding) ... 113,409 103,680
General Partner ............................................ 2,145 1,924
Deferred compensation ...................................... (11,567) (11,567)
Common Units held in trust, at cost ........................ 11,567 11,567
Unearned compensation ...................................... (2,936) (1,924)
Accumulated other comprehensive (loss) ..................... (84,449) (84,394)
--------- ---------
Total partners' capital .......................... 28,169 19,286
--------- ---------
Total liabilities and partners' capital .......... $ 725,870 $ 700,146
========= =========
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
--------------------------
December 28, December 29,
2002 2001
----------- ------------
Revenues
Propane ................................................... $179,324 $153,856
Other ..................................................... 27,043 28,008
-------- --------
206,367 181,864
Costs and expenses
Cost of products sold ..................................... 95,459 79,944
Operating ................................................. 62,674 57,652
General and administrative ................................ 9,021 7,207
Depreciation and amortization ............................. 7,320 7,586
-------- --------
174,474 152,389
Income before interest expense and provision
for income taxes............................................. 31,893 29,475
Interest expense, net ....................................... 8,509 8,724
-------- --------
Income before provision for income taxes .................... 23,384 20,751
Provision for income taxes .................................. 130 138
-------- --------
Net income .................................................. $ 23,254 $ 20,613
======== ========
General Partner's interest in net income .................... $ 591 $ 390
-------- --------
Limited Partners' interest in net income .................... $ 22,663 $ 20,223
======== ========
Net income per unit - basic ................................. $ 0.92 $ 0.82
-------- --------
Weighted average number of units outstanding - basic ........ 24,631 24,631
-------- --------
Net income per unit - diluted ............................... $ 0.92 $ 0.82
-------- --------
Weighted average number of units outstanding - diluted ...... 24,679 24,652
-------- --------
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)
Three Months Ended
--------------------------
December 28, December 29,
2002 2001
------------ ------------
Cash flows from operating activities:
Net income ............................................... $ 23,254 $ 20,613
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation expense ................................ 6,856 7,130
Amortization of intangible assets ................... 464 456
Amortization of unearned compensation ............... 217 163
(Gain) on disposal of property, plant and
equipment, net .................................... (346) (13)
Changes in assets and liabilities, net of dispositions:
(Increase) in accounts receivable ................... (37,640) (18,937)
(Increase) in inventories ........................... (2,242) (1,539)
Decrease in prepaid expenses and
other current assets .............................. 1,670 103
Increase/(decrease) in accounts payable ............. 13,524 (4,449)
(Decrease) in accrued employment
and benefit costs ................................. (2,732) (9,331)
Increase in accrued interest ........................ 8,028 8,581
(Decrease) in other accrued liabilities ............. (3,159) (302)
Net change in other noncurrent assets and liabilities 484 946
-------- --------
Net cash provided by operating activities ...... 8,378 3,421
-------- --------
Cash flows from investing activities:
Capital expenditures .................................... (3,254) (5,216)
Proceeds from sale of property, plant and equipment, net 693 1,198
-------- --------
Net cash (used in) investing activities ........ (2,561) (4,018)
-------- --------
Cash flows from financing activities:
Long-term debt repayments ............................... (58) --
Partnership distributions ............................... (14,533) (14,168)
-------- --------
Net cash (used in) financing activities ........ (14,591) (14,168)
-------- --------
Net (decrease) in cash and cash equivalents ................... (8,774) (14,765)
Cash and cash equivalents at beginning of period .............. 40,955 36,494
-------- --------
Cash and cash equivalents at end of period .................... $ 32,181 $ 21,729
-------- --------
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 Total
Number of Common General Deferred Units in Unearned Comprehensive Partners'
Common Units Unitholders Partner Compensation Trust Compensation (Loss) Capital
------------ ----------- ------- ------------ -------- ------------ ------------- --------
Balance at September 28, 2002... 24,631 $ 103,680 $ 1,924 $(11,567) $11,567 $(1,924) $(84,394) $19,286
Net income ...................... 22,663 591 23,254
Other comprehensive loss:
Net unrealized gains on cash
flow hedges.................... 387 387
Less: reclassification of
realized gains on cash flow
hedges into earnings............ (442) (442)
Comprehensive income.............
Partnership distributions........ (14,163) (370) (14,533)
Grants issued under Restricted
Unit Plan, net of forfeitures... 1,229 (1,229) -
Amortization of Restricted
Unit Plan, net of forfeitures... 217 217
------------ ----------- ------- ------------ -------- ------------ ------------- --------
Balance at December 28, 2002..... 24,631 $ 113,409 $ 2,145 $(11,567) $11,567 $(2,936) $ (84,449) $ 28,169
============ =========== ======= ============ ======== ============ ============= ========
Comprehensive
Income
-------------
Balance at September 28, 2002...
Net income ...................... $ 23,254
Other comprehensive loss:
Net unrealized gains on cash
flow hedges.................... 387
Less: reclassification of
realized gains on cash flow
hedges into earnings............ (442)
-----------
Comprehensive income............. $ 23,199
===========
Partnership distributions........
Grants issued under Restricted
Unit Plan, net of forfeitures...
Amortization of Restricted
Unit Plan, net of forfeitures...
Balance at December 28, 2002.....
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 partner and
its direct and 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 28, 2002, 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. Prior to March 31, 2002, 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 are designated and qualify as cash flow hedges. 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 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.
Operating expenses include unrealized losses in the amount of $1,024 for the
three months ended December 28, 2002 and unrealized gains in the amount of
$2,668 for the three months ended December 29, 2001, attributable to the change
in fair value of derivative instruments not designated as hedges. At December
28, 2002, unrealized gains on derivative instruments designated as cash flow
hedges in the amount of $628 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. Estimates have been made by management in the areas of
insurance and litigation 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.
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:
December 28, September 28,
2002 2002
------------ -------------
Propane .............................. $30,662 $28,799
Appliances ........................... 7,947 7,568
------------ -------------
$38,609 $36,367
============ =============
3. NET INCOME PER UNIT
-------------------
Basic net income per limited partner unit is computed by dividing net income,
after deducting the General Partner's approximate 2% interest, by the weighted
average number of outstanding Common Units. Diluted net income per limited
partner unit is computed by dividing net 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 income per unit, weighted average units
outstanding used to compute basic net income per unit were increased by 47,485
units and 21,121 units for the three months ended December 28, 2002 and December
29, 2001, respectively, to reflect the potential dilutive effect of the time
vested Restricted Units outstanding using the treasury stock method. Diluted net
income per limited partner unit for the three months ended December 28, 2002
does not include 28,228 Restricted Units as their effect would be anti-dilutive.
4. 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 98.11% to
the Common Unitholders and 1.89% to the General Partner, 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 of quarterly distributions paid in any given quarter,
98.11% of the Available Cash is distributed to the Common Unitholders and 1.89%
is distributed to the General Partner. 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 23, 2003, the Partnership declared a quarterly distribution of
$0.5750 per Common Unit, or $2.30 on an annualized basis, for the first quarter
of fiscal 2003 payable on February 11, 2003 to holders of record on February 4,
2003. This quarterly distribution includes incentive distribution rights payable
to the General Partner to the extent the quarterly distribution exceeds $0.55
per Common Unit.
5. LONG-TERM BORROWINGS
--------------------
Long-term borrowings consist of the following:
December 28, September 28,
2002 2002
------------ -------------
Senior Notes, 7.54%, due June 30, 2011 ......... $382,500 $382,500
Senior Notes, 7.37%, due June 30, 2012 ......... 42,500 42,500
Note payable, 8%, due in annual installments
through 2006 .............................. 1,698 1,698
Amounts outstanding under Acquisition Facility
of Revolving Credit Agreement ............. 46,000 46,000
Other long-term liabilities .................... 8 71
------------ -------------
472,706 472,769
Less: current portion .......................... 88,882 88,939
------------ -------------
$383,824 $383,830
============ =============
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 Revolving Credit Agreement discussed below. The 1996 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.
On July 1, 2002, the 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
Credit Agreement.
The Partnership intends to refinance the second annual principal payment of
$42,500 which is due July 1, 2003 and has initiated discussions with various
third parties to reach a refinancing agreement with favorable terms to the
Partnership. In the event the Partnership is unable to or decides not to
refinance this payment, the Partnership currently expects that it will generate
sufficient funds from operations to make the principal payment when it comes
due.
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 December 28, 2002 and September 28, 2002, $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 December 28, 2002. The
Partnership has initiated discussions with the Administrative Agent for the
Revolving Credit Agreement in order to either renew or refinance the existing
Revolving Credit Agreement on a long-term basis.
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 and an interest coverage ratio in excess of 2.50 to 1, (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. During
December 2002, the Partnership amended the 1996 Senior Note Agreement to (i)
eliminate an adjusted net worth financial test to be consistent with the 2002
Senior Note Agreement and Revolving Credit Agreement, and (ii) add a second tier
leverage ratio which has been established to include the underfunded portion of
the Partnership's pension obligations. The Partnership was in compliance with
all covenants and terms of the 1996 Senior Note Agreement, the 2002 Senior Note
Agreement and the Revolving Credit Agreement as of December 28, 2002.
6. 2000 RESTRICTED UNIT PLAN
-------------------------
During fiscal 2003, the Partnership awarded 44,288 Restricted Units under the
2000 Restricted Unit Plan at an aggregate value of $1,229. 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.
7. 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 28, 2002 and September 28, 2002, the Partnership
had accrued insurance liabilities of $26,958 and $26,969, respectively,
representing the total estimated losses under these self-insurance programs. 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.
8. RECENTLY ISSUED ACCOUNTING STANDARDS
------------------------------------
On June 28, 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. The provisions of SFAS 146 are effective for exit or
disposal activities initiated after December 31, 2002. The provisions of this
standard will be reviewed by the Partnership on an ongoing basis, as applicable.
9. SUBSEQUENT EVENT
----------------
During January 2003, the Partnership sold certain assets for total cash proceeds
of approximately $5,800 which is expected to result in a gain on sale of
approximately $2,900 to be recorded in the second quarter of fiscal 2003.
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 28,
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 28, 2002.
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;
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 impact on propane prices and supply of the political and economic
instability of the oil producing nations and other general economic
conditions;
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
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,
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 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 its behalf are expressly qualified in their entirety by the Cautionary
Statements in this Quarterly Report and in future SEC reports.
The following are factors that regularly affect our operating results and
financial condition:
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, including, but not limited
to, economic and political factors impacting crude oil and natural gas supply or
pricing. Propane unit cost changes can occur rapidly over a short period of time
and can impact retail margins. 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, crude
oil and natural gas commodity market conditions.
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 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 propane 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 Unitholders in the first
and fourth fiscal quarters.
WEATHER
Weather conditions have a significant impact on the demand for propane for
both heating and agricultural purposes. Many of our customers rely heavily on
propane as a heating fuel. Accordingly, the volume of propane sold is directly
affected by the severity of the winter weather 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 use,
while sustained colder-than-normal temperatures will tend to result in greater
propane 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 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 propane during periods of short supply. We are currently a party
to propane futures contracts traded on the New York Mercantile Exchange and
enter into forward and option agreements with third parties to purchase and sell
propane at fixed prices in the future. Risk management activities are monitored
by management through enforcement of our Commodity Trading Policy and reported
to our Audit Committee. Risk management transactions do not always result in
increased product margins. See the additional discussion in Item 3 of this
Quarterly Report.
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
benefits, self-insurance and legal 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.
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 28, 2002. We believe that the following are
our critical accounting policies:
REVENUE RECOGNITION. We recognize revenue from the sale of propane 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. 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 28,
2002 for additional disclosure regarding pension and 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.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. See Item 3 of this Quarterly
Report for additional information about accounting for derivative instruments
and hedging activities.
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED DECEMBER 28, 2002 COMPARED TO THREE MONTHS ENDED
DECEMBER 29, 2001
- -------------------------------------------------------------------
REVENUES. Revenues increased 13.5%, or $24.5 million, to $206.4 million for
the three months ended December 28, 2002 compared to $181.9 million for the
three months ended December 29, 2001. This increase is the result of an increase
in retail gallons sold coupled with an increase in average selling prices.
Retail gallons sold increased 15.9 million gallons, or 12.8%, to 139.9 million
gallons in the first quarter of fiscal 2003 compared to 124.0 million gallons in
the prior year quarter due primarily to colder average temperatures experienced
in parts of our service area. Nationwide average temperatures, as reported by
the National Oceanic and Atmospheric Administration ("NOAA"), reflected a return
to a more normal weather pattern for the first quarter of fiscal 2003, compared
to 18% warmer than normal temperatures in the same quarter a year ago. The
coldest weather, however, was reported in the central regions of the United
States while our operations are concentrated in the east and west regions of the
United States. As such, weather was coldest in areas where we have the fewest
customer service centers. Additionally, our volumes continue to be affected by
the impact of a continued economic recession on customer buying habits. Average
selling prices increased as a result of a steady increase in the commodity price
of propane in the first quarter of fiscal 2003 compared to the prior year
quarter.
Revenue from other sources, including sales of appliances and related parts
and services, of $27.0 million for the three months ended December 28, 2002
decreased $1.0 million, or 3.6%, compared to other revenue in the prior year
quarter of $28.0 million.
OPERATING EXPENSES. Operating expenses increased 8.7%, or $5.0 million, to
$62.7 million for the three months ended December 28, 2002 compared to $57.7
million for the three months ended December 29, 2001. Operating expenses in the
first quarter of fiscal 2003 include a $1.0 million unrealized (non-cash) loss
representing the net change in fair values of derivative instruments during the
quarter, compared to a $2.7 million unrealized gain 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
increased $1.3 million, or 2.2%, primarily resulting from higher employee
compensation and benefits to support the increased sales volume, as well as
increases in pension and medical costs.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses of
$9.0 million for the three months ended December 28, 2002 were $1.8 million, or
25.0%, higher than the prior year quarter of $7.2 million. The increase was
primarily attributable to the impact of higher employee compensation and benefit
related costs in the current year quarter.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
remained relatively consistent, decreasing $0.3 million, or 3.9%, to $7.3
million compared to $7.6 million in the prior year quarter.
INCOME BEFORE INTEREST EXPENSE AND INCOME TAXES AND EBITDA. Income before
interest expense and income taxes improved $2.4 million, or 8.1%, to $31.9
million in the three months ended December 28, 2002 compared to $29.5 million in
the prior year quarter. Earnings before interest, taxes, depreciation and
amortization ("EBITDA") amounted to $39.2 million for the three months ended
December 28, 2002, compared to $37.1 million for the prior year quarter, an
increase of $2.1 million, or 5.7%. The improvement in income before interest
expense and income taxes and in EBITDA over the prior year quarter reflects the
impact of 12.8% higher retail volumes sold which was offset by the $3.7 million
unfavorable impact of mark-to-market activity on derivative instruments and the
higher combined operating and general and administrative expenses described
above.
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 herein may not be comparable to similarly titled measures of other
companies. EBITDA has been calculated using elements derived from captions on
the consolidated statements of operations included in this Quarterly Report as
follows (amounts in thousands):
Three Months Ended
-----------------------------
December 28, December 29,
2002 2001
------------ ------------
Income before interest expense and
provision for income taxes............ $ 31,893 $ 29,475
Add: Depreciation and amortization....... 7,320 7,586
------------ ------------
EBITDA.................................... $ 39,213 $ 37,061
============ ============
INTEREST EXPENSE. Net interest expense decreased $0.2 million, or 2.3%, to
$8.5 million for the three months ended December 28, 2002 compared to $8.7
million in the prior year quarter. This decrease is primarily attributable to
lower average interest rates on outstanding borrowings under our Revolving
Credit Agreement.
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, our
second and third fiscal quarters, as customers pay for propane purchased during
the heating season. For the three months ended December 28, 2002, net cash
provided by operating activities was $8.4 million compared to cash provided by
operating activities of $3.4 million for the three months ended December 29,
2001. The increase of $5.0 million was primarily due to $2.1 million higher net
income, after adjusting for non-cash items in both periods (depreciation,
amortization and gains on disposal of assets), as well as the $2.9 million
favorable impact of changes in working capital in comparison to the prior year
period. The changes in working capital result primarily from lower payments
under employee compensation plans and higher accounts payable, offset slightly
by an increase in accounts receivable and inventories in line with increased
volumes.
Net cash used in investing activities during the three months ended
December 28, 2002 consists of capital expenditures of $3.3 million (including
$0.5 million for maintenance expenditures and $2.8 million to support the growth
of operations), offset by net proceeds from the sale of property, plant and
equipment of $0.7 million. Net cash used in investing activities was $4.0
million during the three months ended December 29, 2001 consisting of capital
expenditures of $5.2 million (including $2.3 million for maintenance
expenditures and $2.9 million to support the growth of operations), offset by
net proceeds from the sale of property, plant and equipment of $1.2 million.
Net cash used in financing activities for the three months ended December
28, 2002 was $14.6 million, primarily reflecting payment of our quarterly
distributions of $0.5750 per Common Unit during the first quarter of fiscal
2003. Net cash used in financing activities for the three months ended December
29, 2001 was $14.2 million, reflecting payment of our quarterly distributions of
$0.5625 during the first quarter of fiscal 2002.
On March 5, 1996, pursuant to a Senior Note Agreement (the "1996 Senior
Note Agreement"), we issued $425.0 million of senior notes (the "1996 Senior
Notes") with an annual interest rate of 7.54%. 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. Under the terms of the
1996 Senior Note Agreement, we 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 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
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 our obligations under the 1996 Senior Note Agreement and the Revolving
Credit Agreement. We intend to refinance the second annual principal payment of
$42.5 million on the 1996 Senior Notes which is due July 1, 2003 and have
initiated discussions with various third parties. In the event we are unable to
or decide not to refinance this payment, we currently expect that we will
generate sufficient funds from operations to satisfy the principal payment.
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 December 28, 2002 and September 28, 2002, $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, accordingly, the $46.0 million
outstanding balance has been classified as a current liability at December 28,
2002. We have initiated discussions to extend, or otherwise modify, the
Revolving Credit Agreement on a long-term basis. Although there can be no
assurance, we currently believe that we will be able to extend or otherwise
modify the Revolving Credit Agreement on terms economically satisfactory to us.
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 and an interest coverage ratio in excess of 2.5 to 1, (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. In
addition, the 1996 Senior Note Agreement contained an Adjusted Net Worth test
which required that we maintain an Adjusted Net Worth (as defined in the 1996
Senior Note Agreement) in excess of $50.0 million. During December 2002, we
amended the 1996 Senior Note Agreement to (i) eliminate the Adjusted Net Worth
financial test to be consistent with the 2002 Senior Note Agreement and
Revolving Credit Agreement, and (ii) add a second tier leverage ratio which has
been established to include the underfunded portion of our pension obligations.
We were in compliance with all covenants and terms of the 1996 Senior Note
Agreement, the 2002 Senior Note Agreement and the Revolving Credit Agreement as
of December 28, 2002.
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 23, 2003, we declared a quarterly distribution of $0.5750
per Common Unit, or $2.30 on an annualized basis, for the first quarter of
fiscal 2003 payable on February 11, 2003 to holders of record on February 4,
2003.
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 the $0.55 per Common Unit. With
regard to the first $0.55 of the Common Unit distribution, 98.11% of the
Available Cash is distributed to the Common Unitholders and 1.89% is distributed
to the General Partner. With regard to the balance of the Common Unit
distributions paid, 85% of the Available Cash is distributed to the Common
Unitholders and 15% is distributed to the General Partner.
Our results of operations for the first quarter of fiscal 2003 were
favorably impacted by a return to more normal weather patterns throughout many
regions of the United States. In addition, our efforts to manage our cost
structure, as well as the efficiency of our operations, continue in an effort to
maximize the benefits of the colder weather. As described in more detail above,
the increase in operating and general and administrative expenses was
significantly less, on a percentage basis, than the increase in retail sales
volumes, reflecting the flexible nature of our cost structure. Additionally,
given our cash position and increased cash flow from operations we continue to
effectively manage our cash flow without the need to utilize our working capital
facility under our Revolving Credit Agreement. As we look ahead to the remainder
of fiscal 2003, our operations may be impacted by certain factors beyond our
control, including, but not limited to, a sustained economic recession, a
volatile commodity price environment and a shift to more warmer weather
conditions in our service areas. Based on our current estimates of our cash flow
from operations and cash position, and availability under the Revolving Credit
Agreement (unused borrowing capacity under the working capital facility of $75.0
million at December 28, 2002), 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 December 28, 2002 are due as
follows (amounts in thousands):
Remainder Fiscal
of Fiscal Fiscal Fiscal Fiscal 2007 and
2003 2004 2005 2006 thereafter Total
---------- ---------- ---------- ---------- ---------- ----------
Long-term debt ........................................ $ 88,882 $ 42,910 $ 42,940 $ 42,974 $255,000 $472,706
Operating leases ...................................... 16,681 16,285 12,529 10,025 12,796 68,316
Total long-term debt obligations ---------- ---------- ---------- ---------- ---------- ----------
and lease commitments ............................. $105,563 $ 59,195 $ 55,469 $ 52,999 $267,796 $541,022
========== ========== ========== ========== ========== ==========
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.
RECENTLY ISSUED ACCOUNTING STANDARDS
On June 28, 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. The provisions of SFAS 146 are effective for exit or
disposal activities initiated after December 31, 2002. We will review the
provisions of this standard on an ongoing basis, as applicable.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of December 28, 2002, we were 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 we
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 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 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 it conducts business and establishes 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. Prior to
March 31, 2002, 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 are designated and qualify as cash flow
hedges. For derivative instruments designated as cash flow hedges, we formally
assess, both at the hedge contract's inception and on an ongoing basis, whether
the hedge contract is highly effective in offsetting changes in cash flows of
hedged items. Changes in the fair value of derivative instruments designated as
cash flow hedges are reported in 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 contracts and futures are derived from quoted
market prices for similar instruments traded on the NYMEX.
At December 28, 2002, the fair value of derivative instruments described
above resulted in derivative assets of $1.1 million. Operating expenses include
unrealized losses in the amount of $1.0 million for the three months ended
December 28, 2002 and unrealized gains in the amount of $2.7 million for the
three months ended December 29, 2001, attributable to the change in fair value
of derivative instruments not designated as hedges. At December 28, 2002,
unrealized gains on derivative instruments designated as cash flow hedges in the
amount of $0.6 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 28, 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 $0.7 million
and $1.3 million as of December 28, 2002 and December 29, 2001, respectively.
See also Item 7A of our Annual Report on Form 10-K for the fiscal year ended
September 28, 2002.
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.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Within 90 days prior to the filing date of this Quarterly Report, the
Partnership carried out an evaluation, under the supervision and with the
participation of the Partnership's management, including the Partnership's Chief
Executive Officer and Principal Financial Officer, of the effectiveness of the
design and operation of the Partnership's disclosure controls and procedures
pursuant to Rule 13a-14 under the Securities Exchange Act of 1934 (the "Exchange
Act"). Based upon that evaluation, the Chief Executive Officer and Principal
Financial Officer concluded that the Partnership's disclosure controls and
procedures are effective.
Disclosure controls and procedures are controls and other procedures that
are designed to ensure that information required to be disclosed in the reports
filed or submitted under the Exchange Act is recorded, processed, summarized and
reported, within the time period specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed in
reports filed under the Exchange Act is accumulated and communicated to
management including the Chief Executive Officer and the Principal Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure.
(b) Changes in Internal Controls
There were no significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent to the date of our
most recent evaluation.
PART II
ITEM 1. LEGAL PROCEEDINGS
On January 30, 2003, the plaintiffs in Heritage v. SCANA et al sought the
consent of the Operating Partnership and the other defendants to amend their
complaint in order to assert additional claims against the defendants for aiding
and abetting, misappropriation and unjust enrichment, and indicated that they
will file a motion to amend their complaint if the defendants do not consent to
such amendment. We believe that the claims and proposed additional claims
against us are without merit and are defending the action vigorously.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 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 January 9, 2003 incorporating a press release announcing
the Partnership's Quarterly Earnings Conference Call.
Other items under Part II are not applicable.
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, 2003 /s/ ROBERT M. PLANTE
- ----------------- --------------------
Date Robert M. Plante
Vice President - Finance
(Principal Financial Officer)
February 10, 2003 /s/ MICHAEL A. STIVALA
- ----------------- ----------------------
Date Michael A. Stivala
Controller
(Principal Accounting Officer)
CERTIFICATIONS
I, Mark A. Alexander, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Suburban Propane
Partners, L.P.;
2. Based on my knowledge, this Quarterly Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this Quarterly Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Quarterly Report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
Quarterly Report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this Quarterly Report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
Quarterly Report (the "Evaluation Date"); and
c) Presented in this Quarterly Report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's Board of Supervisors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
Quarterly Report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
February 10, 2003
/ s/ MARK A. ALEXANDER
----------------------
Mark A. Alexander
President and Chief Executive Officer
I, Robert M. Plante, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Suburban Propane
Partners, L.P.;
2. Based on my knowledge, this Quarterly Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this Quarterly Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Quarterly Report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
Quarterly Report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this Quarterly Report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
Quarterly Report (the "Evaluation Date"); and
c) Presented in this Quarterly Report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's Board of Supervisors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
Quarterly Report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
February 10, 2003
/s/ ROBERT M. PLANTE
--------------------
Robert M. Plante
Vice President - Finance
(Principal Financial Officer)