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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 28, 2003
Commission File Number: 1-14222
SUBURBAN PROPANE PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
DELAWARE 22-3410353
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
240 Route 10 West
Whippany, NJ 07981
(973) 887-5300
(Address, including zip code, and telephone
number, including area code, of registrant's principal
executive offices)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
As of August 4, 2003, there were 27,256,162 Common Units outstanding.
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SUBURBAN PROPANE PARTNERS, L.P. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PART I PAGE
----
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets as of June 28, 2003
and September 28, 2002.................................... 1
Condensed Consolidated Statements of Operations for the
three months ended June 28, 2003 and June 29, 2002........ 2
Condensed Consolidated Statements of Operations for the
nine months ended June 28, 2003 and June 29, 2002......... 3
Condensed Consolidated Statements of Cash Flows for the
nine months ended June 28, 2003 and June 29, 2002......... 4
Condensed Consolidated Statement of Partners' Capital for
the nine months ended June 28, 2003....................... 5
Notes to Condensed 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............................................... 23
ITEM 4. CONTROLS AND PROCEDURES................................... 25
PART II
ITEM 1. LEGAL PROCEEDINGS......................................... 26
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ...... 26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.......................... 26
SIGNATURES........................................................... 27
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 from the political, military and
economic instability of the oil producing nations, global terrorism and
other general economic conditions;
o The ability of the Partnership to 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
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
June 28, September 28,
2003 2002
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents ........................................ $ 90,878 $ 40,955
Accounts receivable, less allowance for doubtful accounts
of $3,394 and $1,894, respectively ............................ 48,087 33,002
Inventories ...................................................... 30,696 36,367
Prepaid expenses and other current assets ........................ 7,110 6,465
--------- ---------
Total current assets .................................. 176,771 116,789
Property, plant and equipment, net ................................... 315,244 331,009
Goodwill ............................................................. 243,236 243,260
Other intangible assets, net ......................................... 1,129 1,474
Other assets ......................................................... 9,879 7,614
--------- ---------
Total assets .......................................... $ 746,259 $ 700,146
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable ................................................. $ 27,331 $ 27,412
Accrued employment and benefit costs ............................. 21,016 21,430
Current portion of long-term borrowings .......................... 42,912 88,939
Accrued insurance ................................................ 6,910 8,670
Customer deposits and advances ................................... 8,032 26,125
Accrued interest ................................................. 16,359 8,666
Other current liabilities ........................................ 7,038 6,303
--------- ---------
Total current liabilities .............................. 129,598 187,545
Long-term borrowings ................................................. 383,415 383,830
Postretirement benefits obligation ................................... 33,147 33,284
Accrued insurance .................................................... 20,299 18,299
Accrued pension liability ............................................ 56,176 53,164
Other liabilities .................................................... 6,351 4,738
--------- ---------
Total liabilities ..................................... 628,986 680,860
--------- ---------
Commitments and contingencies
Partners' capital:
Common Unitholders (27,256 and 24,631 units issued and outstanding
at June 28, 2003 and September 28, 2002, respectively) ........ 202,608 103,680
General Partner .................................................. 2,570 1,924
Deferred compensation ............................................ (5,795) (11,567)
Common Units held in trust, at cost .............................. 5,795 11,567
Unearned compensation ............................................ (2,427) (1,924)
Accumulated other comprehensive loss ............................. (85,478) (84,394)
--------- ---------
Total partners' capital ................................ 117,273 19,286
--------- ---------
Total liabilities and partners' capital ................ $ 746,259 $ 700,146
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
SUBURBAN PROPANE PARTNERS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
(UNAUDITED)
Three Months Ended
---------------------------------
June 28, June 29,
2003 2002
------------- -------------
Revenues
Propane ............................................................ $ 126,144 $ 115,571
Other .............................................................. 20,027 22,064
--------- ---------
146,171 137,635
Costs and expenses
Cost of products sold .............................................. 73,325 64,444
Operating .......................................................... 61,193 60,589
General and administrative ......................................... 8,534 8,053
Depreciation and amortization ...................................... 6,717 7,048
--------- ---------
149,769 140,134
(Loss) before interest expense and provision for income taxes (3,598) (2,499)
Interest expense, net ................................................ 8,480 8,339
--------- ---------
(Loss) before provision for income taxes ............................. (12,078) (10,838)
(Benefit) / provision for income taxes ............................... (64) 190
--------- ---------
(Loss) from continuing operations .................................... (12,014) (11,028)
Discontinued operations (Note 12):
Gain on sale of customer service centers ........................... 79 --
--------- ---------
Net (loss) ........................................................... $ (11,935) $ (11,028)
========= =========
General Partner's interest in net (loss) ............................. $ (320) $ (281)
--------- ---------
Limited Partners' interest in net (loss) ............................. $ (11,615) $ (10,747)
========= =========
(Loss) per unit - basic
(Loss) from continuing operations .................................. $ (0.47) $ (0.44)
Gain on sale of customer service centers ........................... -- --
--------- ---------
Net (loss) ......................................................... $ (0.47) $ (0.44)
--------- ---------
Weighted average number of units outstanding - basic ................. 24,918 24,631
--------- ---------
(Loss) per unit - diluted
(Loss) from continuing operations .................................. $ (0.47) $ (0.44)
Gain on sale of customer service centers ........................... -- --
--------- ---------
Net (loss) ......................................................... $ (0.47) $ (0.44)
--------- ---------
Weighted average number of units outstanding - diluted ............... 24,918 24,631
--------- ---------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
SUBURBAN PROPANE PARTNERS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
(UNAUDITED)
Nine Months Ended
---------------------------------
June 28, June 29,
2003 2002
------------- -------------
Revenues
Propane ............................................................ $ 577,006 $ 482,166
Other .............................................................. 69,069 73,220
--------- ---------
646,075 555,386
Costs and expenses
Cost of products sold .............................................. 314,213 241,033
Operating .......................................................... 190,211 177,996
General and administrative ......................................... 27,704 23,369
Depreciation and amortization ...................................... 20,490 21,379
Gain on sale of storage facility ................................... -- (6,768)
--------- ---------
552,618 457,009
Income before interest expense and provision for income taxes......... 93,457 98,377
Interest expense, net ................................................ 26,212 26,373
--------- ---------
Income before provision for income taxes ............................. 67,245 72,004
Provision for income taxes ........................................... 103 518
--------- ---------
Income from continuing operations .................................... 67,142 71,486
Discontinued operations (Note 12):
Gain on sale of customer service centers ........................... 2,483 --
--------- ---------
Net income ........................................................... $ 69,625 $ 71,486
========= =========
General Partner's interest in net income ............................. $ 1,755 $ 1,482
--------- ---------
Limited Partners' interest in net income ............................. $ 67,870 $ 70,004
========= =========
Income per unit - basic
Income from continuing operations .................................. $ 2.65 $ 2.84
Gain on sale of customer service centers ........................... 0.09 --
--------- ---------
Net income ......................................................... $ 2.74 $ 2.84
--------- ---------
Weighted average number of units outstanding - basic ................. 24,727 24,631
--------- ---------
Income per unit - diluted
Income from continuing operations .................................. $ 2.64 $ 2.84
Gain on sale of customer service centers ........................... 0.10 --
--------- ---------
Net income ......................................................... $ 2.74 $ 2.84
--------- ---------
Weighted average number of units outstanding - diluted ............... 24,793 24,665
--------- ---------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
SUBURBAN PROPANE PARTNERS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Nine Months Ended
---------------------------------
June 28, June 29,
2003 2002
------------- -------------
Cash flows from operating activities:
Net income ...................................................... $ 69,625 $ 71,486
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation expense ....................................... 20,161 21,002
Amortization of intangible assets .......................... 329 377
Amortization of debt origination costs ..................... 1,052 990
Amortization of unearned compensation ...................... 658 597
Gain on disposal of property, plant and
equipment, net ........................................... (486) (213)
Gain on sale of customer service centers ................... (2,483) --
Gain on sale of storage facility ........................... -- (6,768)
Changes in assets and liabilities, net of dispositions:
(Increase)/decrease in accounts receivable ................. (15,751) 1,418
Decrease in inventories .................................... 5,479 2,554
(Increase) in prepaid expenses and
other current assets ..................................... (1,285) (3,315)
(Decrease) in accounts payable ............................. (81) (6,289)
(Decrease) in accrued employment
and benefit costs ........................................ (414) (10,283)
Increase in accrued interest ............................... 7,693 7,899
(Decrease) in other accrued liabilities .................... (19,509) (13,771)
(Increase) in other noncurrent assets ...................... (2,496) (243)
Increase in other noncurrent liabilities ................... 6,431 587
-------- --------
Net cash provided by operating activities ............. 68,923 66,028
-------- --------
Cash flows from investing activities:
Capital expenditures ........................................... (9,411) (13,161)
Proceeds from sale of property, plant and equipment ............ 1,683 1,976
Proceeds from sale of customer service centers, net ............ 7,197 --
Proceeds from sale of storage facility, net .................... -- 7,988
-------- --------
Net cash used in investing activities ................. (531) (3,197)
-------- --------
Cash flows from financing activities:
Long-term debt repayments ...................................... (46,438) --
Credit agreement expenses ...................................... (819) --
Net proceeds from issuance of Common Units ..................... 72,386 --
Partnership distributions ...................................... (43,598) (42,522)
-------- --------
Net cash used in financing activities ................. (18,469) (42,522)
-------- --------
Net increase in cash and cash equivalents ............................ 49,923 20,309
Cash and cash equivalents at beginning of period ..................... 40,955 36,494
-------- --------
Cash and cash equivalents at end of period ........................... $ 90,878 $ 56,803
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
SUBURBAN PROPANE PARTNERS, L.P. AND SUBSIDIARIES
CONDENSED 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 28, 2002....... 24,631 $ 103,680 $1,924 $ (11,567) $11,567 $ (1,924) $ (84,394)
Net income .......................... 67,870 1,755
Other comprehensive loss:
Net unrealized losses on cash
flow hedges ..................... (401)
Less: Reclassification of realized
gains on cash flow hedges into
earnings ........................ (683)
Comprehensive income ................
Partnership distributions ........... (42,489) (1,109)
Sale of Common Units under public
offering, net of expenses........ 2,625 72,386
Distribution of common units
held in trust ..................... 5,772 (5,772)
Grants issued under Restricted
Unit Plan, net of forfeitures ..... 1,161 (1,161)
Amortization of Restricted
Unit Plan, net of forfeitures ..... 658
------------ ----------- ------- ------------ -------- ------------ -------------
Balance at June 28, 2003............. 27,256 $ 202,608 $2,570 $ (5,795) $ 5,795 $ (2,427) $ (85,478)
============ =========== ======= ============ ======== ============ =============
Total
Partners' Comprehensive
Capital Income
--------- -------------
Balance at September 28, 2002....... $ 19,286
Net income .......................... 69,625 $ 69,625
Other comprehensive loss:
Net unrealized gains on cash
flow hedges ..................... (401) (401)
Less: Reclassification of realized
gains on cash flow hedges into
earnings ........................ (683) (683)
---------
Comprehensive income ................ $ 68,541
=========
Partnership distributions ........... (43,598)
Sale of Common Units under public
offering, net of expenses........ 72,386
Distribution of common units
held in trust ..................... --
Grants issued under Restricted
Unit Plan, net of forfeitures ..... --
Amortization of Restricted
Unit Plan, net of forfeitures ..... 658
---------
Balance at June 28, 2003............. $117,273
=========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
SUBURBAN PROPANE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
(UNAUDITED)
1. BASIS OF PRESENTATION
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the
accounts of Suburban Propane Partners, L.P. (the "Partnership"), its partner and
its direct and indirect subsidiaries. All significant intercompany transactions
and accounts have been eliminated. The accompanying condensed consolidated
financial statements are unaudited and have been prepared in accordance with the
rules and regulations of the Securities and Exchange Commission. They include
all adjustments that the Partnership considers necessary for a fair statement of
the results for the interim periods presented. Such adjustments consist only of
normal recurring items, unless otherwise disclosed. These financial statements
should be read in conjunction with the Partnership's Annual Report on Form 10-K
for the fiscal year ended September 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 within operating expenses.
At June 28, 2003, the fair value of derivative instruments described above
resulted in derivative assets of $346 included within prepaid expenses and other
current assets and derivative liabilities of $495 included within other current
liabilities. Operating expenses include unrealized gains in the amount of $146
for the three months ended June 28, 2003 and unrealized losses in the amount of
$968 for the three months ended June 29, 2002, attributable to the change in
fair value of derivative instruments not designated as hedges. Operating
expenses include unrealized losses of $1,230 for the nine months ended June 28,
2003 and unrealized gains of $5,116 for the nine months ended June 29, 2002,
attributable to the change in fair value of derivative instruments not
designated as hedges. At June 28, 2003, unrealized losses on derivative
instruments designated as cash flow hedges in the amount of $401 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:
June 28, September 28,
2003 2002
------------- -------------
Propane....................................... $ 22,198 $ 28,799
Appliances.................................... 8,498 7,568
------------- -------------
$ 30,696 $ 36,367
============= =============
3. INCOME/(LOSS) PER UNIT
Basic income/(loss) per limited partner unit is computed by dividing
income/(loss), after deducting the General Partner's approximate 2% interest, by
the weighted average number of outstanding Common Units. Diluted income/(loss)
per limited partner unit is computed by dividing income/(loss), 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 income/(loss) per unit, weighted
average units outstanding used to compute basic income/(loss) per unit were
increased by 66,430 units and 33,533 units for the nine months ended June 28,
2003 and June 29, 2002, respectively, to reflect the potential dilutive effect
of the time vested Restricted Units outstanding using the treasury stock method.
Diluted income/(loss) for the three months ended June 28, 2003 and June 29, 2002
does not include 69,808 and 36,012 Restricted Units, respectively, 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 prior to the public
offering described in Note 11 (the "Public Offering"), and 98.29% to the Common
Unitholders and 1.71% to the General Partner subsequent to the Public Offering,
subject to the payment of incentive distributions to the General Partner to the
extent the quarterly distributions exceed a target distribution of $0.55 per
Common Unit. As defined in the Second Amended and Restated Partnership
Agreement, the General Partner has certain Incentive Distribution Rights
("IDRs") which represent an incentive for the General Partner to increase
distributions to Common Unitholders in excess of the target quarterly
distribution of $0.55 per Common Unit. With regard to the first $0.55 of
quarterly distributions paid in any given quarter, 98.29% of the Available Cash
is distributed to the Common Unitholders and 1.71% is distributed to the General
Partner (98.11% and 1.89%, respectively, prior to the Public Offering). With
regard to the balance of quarterly distributions in excess of the $0.55 per
Common Unit target distribution, 85% of the Available Cash is distributed to the
Common Unitholders and 15% is distributed to the General Partner.
On July 24, 2003, the Partnership declared a quarterly distribution of $0.5875
per Common Unit, or $2.35 on an annualized basis, in respect of the third
quarter of fiscal 2003 payable on August 12, 2003 to holders of record on August
5, 2003. This quarterly distribution represents a $0.0125 per Common Unit, or
$0.05 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
$0.55 per Common Unit.
5. LONG-TERM BORROWINGS
Long-term borrowings consist of the following:
June 28, September 28,
2003 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 ............................ 1,322 1,698
Amounts outstanding under Acquisition Facility
of Revolving Credit Agreement ........... -- 46,000
Other long-term liabilities .................. 5 71
------------- -------------
426,327 472,769
Less: current portion ........................ 42,912 88,939
------------- -------------
$383,415 $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 2002 Senior Note Agreement and the Revolving Credit Agreement
discussed below. The 1996 Senior Notes will mature June 30, 2011, and require
semiannual interest payments. Under the terms of the 1996 Senior Note Agreement,
the Operating Partnership is obligated to pay the principal on the 1996 Senior
Notes in equal annual payments of $42,500 which started July 1, 2002.
On July 1, 2002, the 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. Rather than refinance the second annual principal payment of
$42,500 due under the 1996 Senior Note Agreement, the Partnership elected to
repay this principal payment on June 30, 2003, subsequent to the end of the
third quarter of fiscal 2003.
The Partnership's Revolving Credit Agreement, which provided a $75,000 working
capital facility and a $50,000 acquisition facility, was scheduled to mature on
May 31, 2003. On May 8, 2003, the Partnership completed the Second Amended and
Restated Credit Agreement which extends the Revolving Credit Agreement until May
31, 2006. The Second Amended and Restated Credit Agreement provides a $75,000
working capital facility and a $25,000 acquisition facility. Borrowings under
the Revolving Credit Agreement bear interest at a rate based upon either LIBOR
plus a margin, Wachovia National Bank's prime rate or the Federal Funds rate
plus 1/2 of 1%. An annual fee ranging from .375% to .50%, based upon certain
financial tests, is payable quarterly whether or not borrowings occur. These
terms are substantially the same as the terms under the Revolving Credit
Agreement. Concurrent with the completion of the Second Amended and Restated
Credit Agreement, the Partnership repaid $21,000 of outstanding borrowings under
the Revolving Credit Agreement. On June 19, 2003, the Partnership repaid the
remaining outstanding balance of $25,000 under the Revolving Credit Agreement.
As of June 28, 2003 there were no borrowings outstanding under the Revolving
Credit Agreement. As of September 28, 2002, there was $46,000 outstanding under
the acquisition facility of the previous Revolving Credit Agreement and there
were no borrowings under the working capital facility.
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) require a
leverage ratio of less than 5.25 to 1 when the underfunded portion of the
Partnership's pension obligations is used in the computation of the ratio. 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 June 28, 2003.
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. COMPENSATION DEFERRAL PLAN
Effective May 26, 1999, in connection with the Partnership's Recapitalization,
the Partnership adopted the Compensation Deferral Plan (the "Deferral Plan")
which provided for eligible employees of the Partnership to defer receipt of all
or a portion of the vested Restricted Units granted under the 1996 Restricted
Unit Plan in exchange for the right to participate in and receive certain
payments under the Deferral Plan. Senior management of the Partnership, who
became members of the General Partner, surrendered 596,821 Common Units into the
Deferral Plan, which were deposited into a trust on behalf of these individuals.
Pursuant to the Deferral Plan, these individuals deferred receipt of these
Common Units and related distributions by the Partnership until the date the GP
Loan was repaid in full or the seventh anniversary of the date of the
Recapitalization was completed, whichever they may have chosen, but subject to
the earlier distribution and forfeiture provisions of the Deferral Plan. As a
result of the repayment of the remaining balance of the GP Loan in August 2002,
the Common Units deposited into the trust became eligible to be distributed to
the participants and all forfeiture provisions lapsed.
In January 2003, in accordance with the terms of the Deferral Plan, 297,310 of
the deferred units were distributed to the members of the General Partner and
may now be voted and/or freely traded. Certain members of management elected to
further defer receipt of their deferred units (totaling 299,511 Common Units)
until January 2008. As of June 28, 2003 and September 28, 2002, there were
299,511 and 596,821 Common Units, respectively, held in trust under the Deferral
Plan. The value of the Common Units deposited in the trust and the related
deferred compensation liability in the amount of $5,795 and $11,567 as of June
28, 2003 and September 28, 2002, respectively, are reflected in the accompanying
condensed consolidated balance sheets as components of partners' capital. During
the second quarter of fiscal 2003, the Partnership recorded a $5,772 reduction
in the deferred compensation liability and a corresponding reduction in the
value of Common Units held in trust, both within partners' capital, related to
the value of Common Units distributed from the trust.
8. DEFINED BENEFIT PENSION PLAN
The Partnership has a noncontributory defined benefit pension plan which covers
eligible participants in existence on January 1, 2000. No new participants are
eligible to participate in the plan. The plan provides for a cash balance format
which is designed to evenly spread the growth of a participant's earned
retirement benefit throughout his/her career. On September 20, 2002, the Board
of Supervisors approved an amendment to the defined benefit pension plan
whereby, effective January 1, 2003, future service credits ceased and eligible
employees receive interest credits only toward their ultimate retirement
benefit.
Contributions, as needed, are made to a trust maintained by the Partnership. The
trust's assets consist primarily of common stock, fixed income securities and
real estate. Contributions to the defined benefit pension plan are made by the
Partnership in accordance with the Employee Retirement Income Security Act of
1974 minimum funding standards plus additional amounts which may be determined
from time to time. There were no funding requirements for the defined benefit
pension plan during fiscal 2003, 2002 or 2001. As a result of continued
turbulent capital markets over the past two years, coupled with the low interest
rate environment, the market value of the Partnership's pension portfolio assets
have declined significantly while the actuarial value of the projected benefit
obligation for the Partnership's defined benefit pension plan has steadily
increased. As a result, the projected benefit obligation as of September 28,
2002 exceeded the market value of pension plan assets by $53,164. The
Partnership had a cumulative adjustment for the minimum pension liability of
$85,077 as of September 28, 2002 (the end of the Partnership's 2002 fiscal year)
which is offset by a reduction to accumulated other comprehensive (loss), a
component of partners' capital. On July 23, 2003, subsequent to the end of the
Partnership's third fiscal quarter, the Partnership's Board of Supervisors
approved a voluntary contribution of $10,000 to the defined benefit pension
plan, thereby taking proactive steps to reduce the minimum pension liability.
9. 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 28, 2003 and September 28, 2002, the Partnership had
accrued insurance liabilities of $27,209 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.
10. GUARANTEES
Financial Accounting Standards Board Financial Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," expands the existing disclosure
requirements for guarantees and requires recognition of a liability for the fair
value of guarantees issued after December 31, 2002. The Partnership has residual
value guarantees associated with certain of its operating leases, related
primarily to transportation equipment, with remaining lease periods scheduled to
expire periodically through fiscal 2009. Upon completion of the lease period,
the Partnership guarantees that the fair value of the equipment will equal or
exceed the guaranteed amount, or the Partnership will pay the lessor the
difference. Although the equipment's fair value at the end of their lease term
have historically exceeded the guaranteed amounts, the maximum potential amount
of aggregate future payments the Partnership could be required to make under
these leasing arrangements, assuming the equipment is deemed worthless at the
end of the lease term, is approximately $15,471. Of this amount, the fair value
of residual value guarantees for operating leases entered into after December
31, 2002 was $2,067 which is reflected in other liabilities, with a
corresponding amount included within other assets, in the accompanying condensed
consolidated balance sheet as of June 28, 2003.
11. PUBLIC OFFERING
On June 18, 2003, the Partnership sold 2,282,500 Common Units in a public
offering at a price of $29.00 per Common Unit realizing proceeds of $62,879, net
of underwriting commissions and other offering expenses. On June 26, 2003,
following the underwriters' full exercise of their over-allotment option, the
Partnership sold an additional 342,375 Common Units at $29.00 per Common Unit,
generating additional net proceeds of $9,507. The aggregate net proceeds of
$72,386 were used for general partnership purposes, including working capital
and the repayment of outstanding borrowings under the Revolving Credit Agreement
and the second annual principal payment of $42,500 due under the 1996 Senior
Note Agreement on June 30, 2003. These transactions increased the total number
of Common Units outstanding to 27,256,162. As a result of the Public Offering,
the combined general partner interest in the Partnership was reduced from 1.89%
to 1.71% while the Common Unitholder interest in the Partnership increased from
98.11% to 98.29%.
12. DISCONTINUED OPERATIONS
In line with the Partnership's strategy of divesting operations in slower
growing or non-strategic markets in an effort to identify opportunities to
optimize the return on assets employed, the Partnership sold four customer
service centers during the third quarter of fiscal 2003 and five customer
service centers during the second quarter for total cash proceeds of
approximately $7,197. The Partnership recorded a gain on sale of approximately
$79 and $2,404 for the three months ended June 28, 2003 and March 29, 2003,
respectively, which has been accounted for within discontinued operations
pursuant to Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." Prior period
results of operations attributable to these nine customer service centers were
not significant and, as such, prior period results have not been reclassified to
remove financial results from continuing operations.
13. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2002, the Financial Accounting Standards Board (the "FASB") issued 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 applied by the Partnership on an ongoing
basis, as applicable.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS 149"). SFAS 149 amends
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts. This
statement is effective for contracts entered into or modified after June 30,
2003, and for hedging relationships designated after June 30, 2003. The
Partnership does not anticipate that the adoption of this standard will have a
material impact, if any, on its consolidated financial position, results of
operations or cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150").
SFAS 150 establishes standards for the classification and measurement of certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Many of these instruments
were previously required to be classified as equity. This statement is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective for the Partnership's fourth quarter in fiscal 2003. The
Partnership does not anticipate that the adoption of this standard will have a
material impact, if any, on its consolidated financial position, results of
operations or cash flows.
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
28, 2003. The discussion should be read in conjunction with the historical
consolidated financial statements and notes thereto included in the Annual
Report on Form 10-K for the most recent fiscal year ended September 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 from the political, military and
economic instability of the oil producing nations, global terrorism and
other general economic conditions;
o The ability of the Partnership to 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 level of profitability in the retail propane business 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
profitability. There is no assurance that we will be able to pass on product
cost increases fully or immediately, particularly when product costs increase
rapidly. Therefore, average retail sales prices can vary significantly from year
to year as product costs fluctuate with propane, 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 may 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 other postretirement
benefits.
SELF-INSURANCE RESERVES. Our accrued insurance reserves represent the estimated
costs of known and anticipated or unasserted claims under our general and
product, workers' compensation and automobile insurance policies. Accrued
insurance provisions for unasserted claims arising from unreported incidents are
based on an analysis of historical claims data. For each claim, we record a
self-insurance provision up to the estimated amount of the probable claim or the
amount of the deductible, whichever is lower, utilizing actuarially determined
loss development factors applied to actual claims data.
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 JUNE 28, 2003 COMPARED TO THREE MONTHS ENDED JUNE 29, 2002
- -----------------------------------------------------------------------------
REVENUES. Revenues increased 6.3%, or $8.6 million, to $146.2 million for
the three months ended June 28, 2003 compared to $137.6 million for the three
months ended June 29, 2002. Revenues from retail propane activities increased
$22.0 million, or 22.0%, to $122.3 million for the three months ended June 28,
2003 compared to $100.3 million in the prior year quarter. This increase is the
result of an increase in average selling prices, coupled with an increase in
retail gallons sold. Average selling prices increased 18.2% as a result of
sustained higher commodity prices for propane. The price of propane began a
steady increase in August of 2002 and has remained higher than prior year levels
throughout fiscal 2003. Retail gallons sold increased 2.9 million gallons, or
3.3%, to 89.6 million gallons in the third quarter of fiscal 2003 compared to
86.7 million gallons in the prior year quarter. The increase in retail gallons
sold was primarily attributable to cooler temperatures during the third quarter
of fiscal 2003 compared to the prior year quarter, particularly in the northeast
and mid-atlantic regions of the United States, offset to an extent by the impact
of a continued sluggish economy on customer buying habits. For the third quarter
of fiscal 2003, nationwide average temperatures, as reported by the National
Oceanic and Atmospheric Administration ("NOAA"), were 9% colder than the prior
year quarter and 4% warmer than normal.
Revenues from wholesale and risk management activities of $3.9 million for
the three months ended June 28, 2003 decreased $11.3 million, compared to
revenues of $15.2 million for the three months ended June 29, 2002. The decline
in wholesale and risk management activities results from lower volumes sold
primarily resulting from our reduced emphasis on the lower-margin wholesale
market over the past few years. Revenue from other sources, including sales of
appliances and related parts and services, of $20.0 million for the three months
ended June 28, 2003 decreased $2.1 million, or 9.5%, compared to other revenue
in the prior year quarter of $22.1 million.
COST OF PRODUCTS SOLD. The cost of products sold reported in the
consolidated statements of operations represents the weighted average unit cost
of propane sold, including transportation costs to deliver product from our
supply points to storage or to our customer service centers. Cost of products
sold also includes the cost of appliances and related parts sold or installed by
our customer service centers computed on a basis that approximates the average
cost of the products. Cost of products sold is reported exclusive of any
depreciation and amortization as such amounts are reported separately within the
consolidated statements of operations.
Cost of products sold increased $8.9 million, or 13.8%, to $73.3 million
for the three months ended June 28, 2003 compared to $64.4 million in the prior
year quarter. The increase results primarily from a $19.1 million impact from
the aforementioned increase in the commodity price of propane resulting in a
44.8% increase in the average unit cost of propane during the three months ended
June 28, 2003 compared to the prior year quarter, coupled with the
aforementioned increase in retail volumes sold resulting in an increase of $1.4
million; offset by a $11.2 million decrease from the decline in wholesale and
risk management activities described above. For the three months ended June 28,
2003, cost of products sold represented 50.2% of revenues compared to 46.8% in
the prior year period. The increase in the cost of products sold as a percentage
of revenues relates primarily to steadily increasing costs of propane during the
first half of fiscal 2003 which remained higher during the third quarter of
fiscal 2003 compared to steadily declining product costs in the prior year.
OPERATING EXPENSES. All other costs of operating our retail propane
distribution and appliance sales and service operations are reported within
operating expenses in the consolidated statements of operations. These operating
expenses include the compensation and benefits of field and direct operating
support personnel, costs of operating and maintaining our vehicle fleet,
overhead and other costs of our purchasing, training and safety departments and
other direct and indirect costs of our customer service centers. Operating
expenses increased 1.0%, or $0.6 million, to $61.2 million for the three months
ended June 28, 2003 compared to $60.6 million for the three months ended June
29, 2002. Operating expenses in the third quarter of fiscal 2003 include a $0.1
million unrealized (non-cash) gain representing the net change in fair values of
derivative instruments during the quarter, compared to a $1.0 million unrealized
loss in the prior year quarter (see Item 3 Quantitative and Qualitative
Disclosures About Market Risk for information on our policies regarding the
accounting for derivative instruments). In addition to the non-cash impact of
changes in the fair value of derivative instruments, operating expenses
increased $1.7 million as a result of $0.6 million increased costs for operating
our fleet primarily due to escalating fuel costs, $0.8 million higher bad debt
expense, $0.3 million higher pension costs and $0.4 million increased insurance
costs; offset by $0.3 million lower medical costs. Our bad debt expense
increased as a result of a combination of higher sales volumes, significantly
higher commodity prices resulting in higher prices to our customers and general
economic conditions.
GENERAL AND ADMINISTRATIVE EXPENSES. All costs of our back office support
functions, including compensation and benefits for executives and other support
functions, as well as other costs and expenses to maintain finance and
accounting, treasury, legal, human resources, corporate development and the
information systems functions are reported within general and administrative
expenses in the consolidated statements of operations. General and
administrative expenses of $8.5 million for the three months ended June 28, 2003
were $0.4 million, or 4.9%, higher than the prior year quarter of $8.1 million.
The increase was primarily attributable to the impact of $0.2 million higher
fees for professional services in the current year quarter and slightly higher
payroll costs.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
remained relatively consistent, decreasing $0.3 million, or 4.3%, to $6.7
million compared to $7.0 million in the prior year quarter.
(LOSS) BEFORE INTEREST EXPENSE AND INCOME TAXES AND EBITDA. (Loss) before
interest expense and income taxes of $3.6 million in the three months ended June
28, 2003 increased $1.1 million, or 44.0%, compared to a loss of $2.5 million in
the prior year quarter. Earnings before interest, taxes, depreciation and
amortization ("EBITDA") amounted to $3.2 million for the three months ended June
28, 2003, compared to $4.5 million for the prior year quarter, a decrease of
$1.3 million, or 28.9%. These changes in the loss before interest expense and
income taxes and in EBITDA compared to the prior year quarter reflect the higher
combined operating and general and administrative expenses described above;
offset by the impact of 3.3% higher retail volumes sold and the $1.1 million
favorable impact of mark-to-market activity on derivative instruments.
EBITDA represents income/(loss) before deducting interest expense, income
taxes, depreciation and amortization. Our management uses EBITDA as a measure of
liquidity and we are including it because we believe that it provides our
investors and industry analysts with additional information to evaluate our
ability to meet our debt service obligations and to pay our quarterly
distributions to holders of our Common Units. Moreover, our senior note
agreements and our revolving credit agreement require us to use EBITDA in
calculating our leverage and interest coverage ratios. EBITDA is not a
recognized term under generally accepted accounting principles ("GAAP") and
should not be considered as an alternative to net income/(loss) or net cash
provided by operating activities determined in accordance with GAAP. Because
EBITDA as determined by us excludes some, but not all, items that affect net
income/(loss), it may not be comparable to EBITDA or similarly titled measures
used by other companies. The following table sets forth (i) our calculation of
EBITDA and (ii) a reconciliation of EBITDA, as so calculated, to our net cash
provided by operating activities (amounts in thousands):
Three Months Ended
------------------------------
June 28, June 29,
2003 2002
------------- -------------
Net (loss) ................................... $(11,935) $(11,028)
Add:
(Benefit) / provision for income taxes .... (64) 190
Interest expense, net ..................... 8,480 8,339
Depreciation and amortization ............. 6,717 7,048
------------- -------------
EBITDA ....................................... 3,198 4,549
------------- -------------
Add / (subtract):
Benefit / (provision) for income taxes .... 64 (190)
Interest expense, net ..................... (8,480) (8,339)
(Gain) / loss on disposal of property,
plant and equipment, net................... (166) 63
Gain on sale of customer service centers .. (79) --
Changes in working capital and other assets
and liabilities ........................... 51,020 33,823
------------- -------------
Net cash provided by operating activities .... $ 45,557 $ 29,906
============= =============
Net cash used in investing activities ........ $ (1,205) $ (3,213)
============= =============
Net cash provided by / (used in) financing
activities ................................... $ 10,655 $(14,186)
============= =============
INTEREST EXPENSE. Net interest expense increased $0.2 million, or 2.4%, to
$8.5 million for the three months ended June 28, 2003 compared to $8.3 million
in the prior year quarter.
DISCONTINUED OPERATIONS. As part of our overall business strategy, we
continually monitor and evaluate our existing operations to identify
opportunities that will allow us to optimize our return on assets employed by
selectively consolidating or divesting operations in slower growing or
non-strategic markets. In line with that strategy, we sold four customer service
centers during the third quarter of fiscal 2003 for total cash proceeds of
approximately $1.5 million. We recorded a gain on sale of approximately $0.1
million, which has been accounted for within discontinued operations pursuant to
Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets."
NINE MONTHS ENDED JUNE 28, 2003 COMPARED TO NINE MONTHS ENDED JUNE 29, 2002
- ---------------------------------------------------------------------------
REVENUES. Revenues increased 16.3%, or $90.7 million, to $646.1 million for
the nine months ended June 28, 2003 compared to $555.4 million for the nine
months ended June 29, 2002. Revenues from retail propane activities increased
$113.9 million, or 25.3%, to $563.8 million for the nine months ended June 28,
2003 compared to $449.9 million in the prior year period. This increase is the
result of an increase in average propane selling prices, coupled with an
increase in retail gallons sold. Propane selling prices averaged 15.8% higher
during the nine months ended June 28, 2003 compared to the prior period as a
result of steadily increasing costs of propane throughout the first half of
fiscal 2003 which remained higher during the third quarter. Retail gallons sold
increased 33.2 million gallons, or 8.8%, to 412.5 million gallons for the nine
months ended June 28, 2003 compared to 379.3 million gallons in the prior year
period due primarily to colder average temperatures experienced in parts of our
service area, particularly during the six month peak heating season from October
2002 through March 2003.
Temperatures nationwide, as reported by NOAA, averaged 3% warmer than
normal for the first nine months of fiscal 2003, compared to 15% warmer than
normal temperatures in the same period a year ago, or 12% colder conditions
year-over-year. The coldest weather conditions, however, were experienced in the
eastern and central regions of the United States which reported normal average
temperatures for the first nine months of fiscal 2003, compared to temperatures
during the comparable period in the prior year that were 18% warmer than normal.
On a year-to-date basis, average temperatures in the western regions of the
United States were 16% warmer than normal in fiscal 2003, compared to 9% warmer
than normal in the prior year period, or 7% warmer temperatures year-over-year.
Additionally, our volumes continue to be affected by the impact of a continued
economic recession on customer buying habits.
Revenues from wholesale and risk management activities of $13.2 million for
the nine months ended June 28, 2003 decreased $19.1 million, or 59.1%, compared
to revenues of $32.3 million for the nine months ended June 29, 2002 primarily
as a result of lower volumes sold in the wholesale market. Revenue from other
sources, including sales of appliances and related parts and services, of $69.1
million for the nine months ended June 28, 2003 decreased $4.1 million, or 5.6%,
compared to other revenue in the prior year of $73.2 million.
COST OF PRODUCTS SOLD. Cost of products sold increased $73.2 million, or
30.4%, to $314.2 million for the nine months ended June 28, 2003 compared to
$241.0 million in the prior year period. The increase results primarily from a
$78.7 million impact from the aforementioned increase in the commodity price of
propane resulting in a 39.4% increase in the average unit cost of propane during
the nine months ended June 28, 2003 compared to the prior year period, coupled
with the aforementioned increase in retail volumes sold resulting in an increase
of $16.0 million; offset by a $20.9 million decrease from the decline in
wholesale and risk management activities described above. For the nine months
ended June 28, 2003, cost of products sold represented 48.6% of revenues
compared to 43.4% in the prior year period. The increase in the cost of products
sold as a percentage of revenues relates primarily to steadily increasing costs
of propane during the first half of fiscal 2003 which remained higher during the
third quarter of fiscal 2003 compared to steadily declining product costs in the
prior year.
OPERATING EXPENSES. Operating expenses increased 6.9%, or $12.2 million, to
$190.2 million for the nine months ended June 28, 2003 compared to $178.0
million for the nine months ended June 29, 2002. Operating expenses in the first
nine months of fiscal 2003 include a $1.2 million unrealized (non-cash) loss
representing the net change in fair values of derivative instruments, compared
to a $5.1 million unrealized gain 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). In addition
to the non-cash impact of changes in the fair value of derivative instruments,
operating expenses increased $5.9 million primarily resulting from $2.4 million
higher employee compensation and benefits to support the increased sales volume,
$1.6 million higher costs to operate our fleet primarily from increased fuel
costs and $1.0 million increased pension costs; offset by savings in other
expense categories. In addition, we experienced $2.1 million higher bad debt
expense as a result of the significant increase in the commodity price of
propane resulting in higher prices to our customers, higher sales volumes and
general economic conditions.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses of
$27.7 million for the nine months ended June 28, 2003 were $4.3 million, or
18.4%, higher than the prior year period of $23.4 million. The increase was
primarily attributable to the impact of $1.2 million higher employee
compensation and benefit related costs, as well as $0.6 million higher fees for
professional services in the current year period.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
decreased $0.9 million, or 4.2%, to $20.5 million for the nine months ended June
28, 2003, compared to $21.4 million for the nine months ended June 29, 2002.
GAIN ON SALE OF STORAGE FACILITY. On January 31, 2002 (the second quarter
of fiscal 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 $4.9 million, or 5.0%, to $93.5
million in the nine months ended June 28, 2003, compared to $98.4 million in the
prior year period. Earnings before interest, taxes, depreciation and
amortization ("EBITDA") amounted to $116.4 million for the nine months ended
June 28, 2003, compared to $119.8 million for the prior year period, a decline
of $3.4 million, or 2.8%. The decline in income before interest expense and
income taxes and in EBITDA over the prior year period reflects the impact of
8.8% higher retail volumes sold which was offset by the $6.3 million unfavorable
impact of mark-to-market activity on derivative instruments year-over-year, the
$6.8 million gain on sale of our Hattiesburg, Mississippi storage facility
impacting prior year results and the higher combined operating and general and
administrative expenses (described above) in support of higher business
activity. Additionally, the $2.5 million gain reported from the sale of nine
customer service centers during fiscal 2003, reported within discontinued
operations, had a favorable impact on EBITDA for the nine months ended June 28,
2003.
EBITDA represents income before deducting interest expense, income taxes,
depreciation and amortization. Our management uses EBITDA as a measure of
liquidity and we are including it because we believe that it provides our
investors and industry analysts with additional information to evaluate our
ability to meet our debt service obligations and to pay our quarterly
distributions to holders of our Common Units. Moreover, our senior note
agreements and our revolving credit agreement require us to use EBITDA in
calculating our leverage and interest coverage ratios. EBITDA is not a
recognized term under generally accepted accounting principles ("GAAP") and
should not be considered as an alternative to net income or net cash provided by
operating activities determined in accordance with GAAP. Because EBITDA as
determined by us excludes some, but not all, items that affect net income, it
may not be comparable to EBITDA or similarly titled measures used by other
companies. The following table sets forth (i) our calculation of EBITDA and (ii)
a reconciliation of EBITDA, as so calculated, to our net cash provided by
operating activities (amounts in thousands):
Nine Months Ended
------------------------------
June 28, June 29,
2003 2002
------------- -------------
Net income ..................................... $ 69,625 $ 71,486
Add:
Provision for income taxes .................. 103 518
Interest expense, net ....................... 26,212 26,373
Depreciation and amortization ............... 20,490 21,379
------------- -------------
EBITDA ......................................... 116,430 119,756
------------- -------------
Add/(subtract):
Provision for income taxes .................. (103) (518)
Interest expense, net ....................... (26,212) (26,373)
Gain on disposal of property, plant
and equipment, net........................... (486) (213)
Gain on sale of customer service centers .... (2,483) --
Gain on sale of storage facility ............ -- (6,768)
Changes in working capital and other assets
and liabilities.............................. (18,223) (19,856)
------------- -------------
Net cash provided by operating activities ...... $ 68,923 $ 66,028
============= =============
Net cash used in investing activities .......... $ (531) $ (3,197)
============= =============
Net cash used in financing activities .......... $ (18,469) $ (42,522)
============= =============
INTEREST EXPENSE. Net interest expense decreased $0.2 million, or 0.8%, to
$26.2 million for the nine months ended June 28, 2003 compared to $26.4 million
in the prior year period. This decrease is primarily attributable to lower
average interest rates on outstanding borrowings under our Revolving Credit
Agreement.
DISCONTINUED OPERATIONS. As part of our overall business strategy, we
continually monitor and evaluate our existing operations to identify
opportunities that will allow us to optimize our return on assets employed by
selectively consolidating or divesting operations in slower growing or
non-strategic markets. In line with that strategy, we sold nine customer service
centers during the first nine months of fiscal 2003 for total cash proceeds of
approximately $7.2 million. We recorded a gain on sale of approximately $2.5
million, which has been accounted for within discontinued operations pursuant to
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
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 nine months ended June 28, 2003, net cash provided
by operating activities was $68.9 million compared to cash provided by operating
activities of $66.0 million for the nine months ended June 29, 2002. The
increase of $2.9 million, or 4.4%, was primarily due to $1.4 million higher
income, after adjusting for non-cash items in both periods (depreciation,
amortization and gains on disposal of assets), a $3.6 million net increase in
other noncurrent assets and noncurrent liabilities (including pension and
insurance liabilities); offset by a $2.1 million unfavorable impact of changes
in working capital in comparison to the prior year period. The changes in
working capital result primarily from an increase in accounts receivable in line
with increased sales volumes and higher average selling prices, offset to a
degree by lower payments under employee compensation plans and decreased
inventories.
Net cash used in investing activities of $0.5 million for the nine months
ended June 28, 2003 consists of net proceeds from the sale of nine customer
service centers of $7.2 million and net proceeds of $1.7 million from the sale
of property, plant and equipment; offset by capital expenditures of $9.4 million
(including $2.8 million for maintenance expenditures and $6.6 million to support
the growth of operations). Net cash used in investing activities during the nine
months ended June 29, 2002 consists of net proceeds from the sale of assets 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 financing activities for the nine months ended June 28,
2003 was $18.5 million as a result of (i) the payments of our quarterly
distributions of $0.5750 per Common Unit during the first, second and third
quarters of fiscal 2003 amounting to $43.6 million, (ii) the repayment of all
outstanding borrowings under our Revolving Credit Agreement amounting to $46.0
million, (iii) the payment of $0.8 million in fees associated with the renewal
and extension of our Revolving Credit Agreement during May 2003; offset by net
proceeds of $72.4 million from a follow-on public offering of approximately 2.6
million Common Units (including full exercise of the underwriters'
over-allotment option) which was completed during the third quarter of fiscal
2003. 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
$0.5625 during the first, second and third quarters 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 2002 Senior Note Agreement and the Revolving Credit
Agreement discussed below. 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. Rather than refinance
the second annual principal payment of $42,500 due under the 1996 Senior Note
Agreement, we elected to repay this principal payment on June 30, 2003,
subsequent to the end of the third quarter of fiscal 2003.
Our Revolving Credit Agreement, which provided a $75.0 million working
capital facility and a $50.0 million acquisition facility, was scheduled to
mature on May 31, 2003. On May 8, 2003, we completed the Second Amended and
Restated Credit Agreement (the "Revolving Credit Agreement") which extends the
previous Revolving Credit Agreement until May 31, 2006. The Revolving Credit
Agreement provides a $75.0 million working capital facility and reduces the
acquisition facility from $50.0 million to $25.0 million. 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. These terms are
substantially the same as the terms under the previous Revolving Credit
Agreement. In connection with the completion of the Revolving Credit Agreement,
we repaid $21.0 million of outstanding borrowings under the Revolving Credit
Agreement. On June 19, 2003, we repaid the remaining outstanding balance of
$25.0 million under the Revolving Credit Agreement. As of June 28, 2003 there
were no borrowings outstanding under the Revolving Credit Agreement. As of
September 28, 2002, $46.0 million was outstanding under the acquisition facility
of the previous Revolving Credit Agreement and there were no borrowings under
the working capital facility.
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 using EBITDA in
such ratio calculations, (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, we 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) require a leverage ratio of less than 5.25 to 1 when the underfunded
portion of the Partnership's pension obligations is used in the computation of
the ratio. We were in compliance with all covenants and terms of all of our debt
agreements as of June 28, 2003 and at the end of each fiscal quarter for all
periods presented.
We will make distributions in an amount equal to all of our Available Cash,
as defined in the Second Amended and Restated Partnership Agreement,
approximately 45 days after the end of each fiscal quarter to holders of record
on the applicable record dates. The Board of Supervisors reviews the level of
Available Cash on a quarterly basis based upon information provided by
management. On July 24, 2003, we declared a quarterly distribution of $0.5875
per Common Unit, or $2.35 on an annualized basis, for the third quarter of
fiscal 2003 payable on August 12, 2003 to holders of record on August 5, 2003.
This quarterly distribution represents a $0.0125 per Common Unit, or $0.05 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 $0.55 per
Common Unit.
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, 98.29% of the
Available Cash is distributed to the Common Unitholders and 1.71% is distributed
to the General Partner (98.11% and 1.89%, respectively, prior to our June 2003
public offering). With regard to the balance of the Common Unit distributions
paid, 85% of the Available Cash is distributed to the Common Unitholders and 15%
is distributed to the General Partner.
The first nine months of fiscal 2003 presented a return to more normal
winter weather conditions across much of the United States, a challenging
commodity price and supply environment and the sustained economic recession. Our
results of operations were favorably impacted by a return to more normal weather
patterns, particularly in the east, and our continued focus on managing our cost
structure; despite the negative affects of unseasonably warm weather in the west
and the economy. In addition, our product supply and risk management activities
helped to ensure adequate supply and to mitigate the impact of propane price
volatility during a period of uncertainty surrounding the situation in Iraq and
other oil producing nations. Given our cash position ($90.9 million at June 28,
2003) and positive 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. Additionally, during the third quarter of fiscal
2003 we completed a successful follow-on public offering of approximately 2.6
million Common Units (including the full exercise of the underwriters'
over-allotment option) at a price of $29.00 per Common Unit which generated net
proceeds of $72.4 million, after underwriter discounts and offering expenses.
During the third quarter of fiscal 2003, we also amended and extended our
Revolving Credit Agreement to May 31, 2006 on terms that are substantially the
same as our previous Revolving Credit Agreement which was set to expire on May
31, 2003.
With our cash position, continued positive cash flow generated from
operating activities and the net proceeds generated in the public offering of
Common Units, we have made a conscious effort to further reduce our leverage. In
that regard, during the third quarter of fiscal 2003 we repaid all of the
outstanding borrowings under our Revolving Credit Agreement amounting to $46.0
million, on June 30, 2003 (subsequent to the end of our third fiscal quarter) we
repaid our second annual principal payment of $42.5 million due under our 1996
Senior Note Agreement, and during the fourth quarter of fiscal 2003, we elected
to make a voluntary contribution of $10 million to the defined benefit pension
plan, thereby reducing our accrued pension liability. As we look ahead to the
remainder of fiscal 2003, the seasonal nature of the propane business is such
that lower revenues and net losses are expected during the fourth quarter. Based
on our current estimates of our cash flow from operations and cash position,
availability under the Revolving Credit Agreement (unused borrowing capacity
under the working capital facility of $75.0 million at June 28, 2003), we expect
to have sufficient funds to meet our current and forseeable future obligations.
PENSION PLAN ASSETS
As a result of continued turbulent capital markets over the past two years,
coupled with the low interest rate environment, the market value of our pension
portfolio assets has declined significantly while the actuarial value of the
projected benefit obligation for our defined benefit pension plan has steadily
increased. As a result, the projected benefit obligation as of September 28,
2002 exceeded the market value of pension plan assets by $53.1 million. The
unrealized losses experienced in the pension assets resulted in the recording of
a cumulative $85.1 million reduction to accumulated other comprehensive
(loss)/income, a component of partners' capital, at the end of fiscal 2002 in
order to adjust our pension liability to reflect the underfunded position. The
cumulative adjustments for the minimum pension liability are attributable to the
level of unrealized losses experienced on our pension assets over the past two
years and represent non-cash charges to our partners' capital with no impact on
the results of operations for the fiscal year ended September 28, 2002.
There were no funding requirements for the defined benefit pension plan
during fiscal 2003, 2002 or 2001. In an effort to minimize future increases in
the benefit obligations, during the fourth quarter of fiscal 2002, we adopted an
amendment to the defined benefit pension plan which ceased future service
credits effective January 1, 2003. On July 23, 2003, subsequent to the end of
our third quarter of fiscal 2003, our Board of Supervisors approved a voluntary
contribution of $10 million to the defined benefit pension plan, thereby taking
proactive steps to reduce the minimum pension liability.
LONG-TERM DEBT OBLIGATIONS AND OTHER COMMITMENTS
Long-term debt obligations and future minimum rental commitments under
noncancelable operating lease agreements as of June 28, 2003 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 ..................... $ 42,501 $ 42,911 $ 42,940 $ 42,975 $255,000 $426,327
Operating leases ................... 5,704 17,400 13,019 9,995 12,191 58,309
Total long-term debt obligations ---------- ---------- ---------- ---------- ---------- ----------
and lease commitments ........ $ 48,205 $ 60,311 $ 55,959 $ 52,970 $267,191 $484,636
========== ========== ========== ========== ========== ==========
Additionally, we have standby letters of credit in the aggregate amount of
$35.4 million, in support of our casualty insurance coverage and certain lease
obligations, which expire periodically through March 1, 2004.
Financial Accounting Standards Board Financial Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," expands the existing disclosure
requirements for guarantees and requires recognition of a liability for the fair
value of guarantees issued after December 31, 2002. We have residual value
guarantees associated with certain of our operating leases, related primarily to
transportation equipment, with remaining lease periods scheduled to expire
periodically through fiscal 2009. Upon completion of the lease period, we
guarantee that the fair value of the equipment will equal or exceed the
guaranteed amount, or we will pay the lessor the difference. Although the
equipment's fair value at the end of their lease term have historically exceeded
the guaranteed amounts, the maximum potential amount of aggregate future
payments we could be required to make under these leasing arrangements, assuming
the equipment is deemed worthless at the end of the lease term, is approximately
$15.5 million. Of this amount, the fair value of residual value guarantees for
operating leases entered into after December 31, 2002 was $2.1 million which is
reflected in other liabilities, with a corresponding amount included within
other assets, in the accompanying condensed consolidated balance sheet as of
June 28, 2003.
PUBLIC OFFERING
On June 18, 2003, we sold 2,282,500 Common Units in a public offering at a
price of $29.00 per Common Unit realizing proceeds of $62.9 million, net of
underwriting commissions and other offering expenses. On June 26, 2003,
following the underwriters' full exercise of their over-allotment option, we
sold an additional 342,375 Common Units at $29.00 per Common Unit, generating
additional net proceeds of $9.5 million. The aggregate net proceeds of $72.4
million were used for general partnership purposes, including working capital
and the repayment of outstanding borrowings under our Revolving Credit Agreement
and the second annual principal payment of $42.5 million due under our 1996
Senior Note Agreement on June 30, 2003. These transactions increased the total
number of Common Units outstanding to 27,256,162. As a result of the public
offering, the combined general partner interest in the Partnership was reduced
from 1.89% to 1.71% while the Common Unitholder interest in the Partnership
increased from 98.11% to 98.29%.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 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 apply the
provisions of this standard on an ongoing basis, as applicable.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS 149"). SFAS 149 amends
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. This statement is, in general, effective for contracts
entered into or modified after June 30, 2003, and for hedging relationships
designated after June 30, 2003. We do not anticipate that the adoption of this
standard will have a material impact, if any, on our consolidated financial
position, results of operations or cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("SFAS 150"). SFAS 150 establishes standards classification and measurement of
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
these instruments were previously required to be classified as equity. This
statement is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective for our fourth quarter in fiscal 2003.
We do not anticipate that the adoption of this standard will have a material
impact, if any, on our consolidated financial position, results of operations or
cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of June 28, 2003, 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 we conduct business and establish credit limits to
reduce exposure to credit risk of non-performance.
DERIVATIVE INSTRUMENTS
We account for derivative instruments in accordance with the provisions of
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133"), as amended by SFAS No. 137 and SFAS No. 138. All derivative
instruments are reported on the balance sheet, within other current assets or
other current liabilities, at their fair values. On the date that futures,
forward and option contracts are entered into, we make a determination as to
whether the derivative instrument qualifies for designation as a hedge. 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 June 28, 2003, the fair value of derivative instruments described above
resulted in derivative assets of $0.3 million included within prepaid expenses
and other current assets and derivative liabilities of $0.5 million included
within other current liabilities. Operating expenses include unrealized gains in
the amount of $0.1 million for the three months ended June 28, 2003 and
unrealized losses in the amount of $1.0 million for the three months ended June
29, 2002, attributable to the change in fair value of derivative instruments not
designated as hedges. Operating expenses include unrealized losses of $1.2
million for the nine months ended June 28, 2003 and unrealized gains of $5.1
million for the nine months ended June 29, 2002, attributable to the change in
fair value of derivative instruments not designated as hedges. At June 28, 2003,
unrealized losses on derivative instruments designated as cash flow hedges in
the amount of $0.4 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 June 28, 2003 was
performed. Based on this analysis, a hypothetical 10% adverse change in market
prices for each of the future months for which an option, futures and/or forward
contract exists indicates either a reduction in potential future gains or
potential losses in future earnings of $2.5 million and $1.5 million as of June
28, 2003 and June 29, 2002, 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 February 6, 2003, the plaintiffs in Heritage v. SCANA et al filed a motion
to amend its complaint to assert additional claims against all defendants,
including three new claims against our Operating Partnership: aiding and
abetting; misappropriation; and unjust enrichment. The court has granted this
motion. We believe that the claims and proposed additional claims against our
Operating Partnership are without merit and are defending the action vigorously.
The court has entered an order setting this matter for trial any time after July
1, 2003. See additional discussion of this matter in the Annual Report on Form
10-K for the most recent fiscal year ended September 28, 2002.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Partnership held its 2003 Tri-Annual Meeting of the Limited Partners of
Suburban Propane Partners, L.P. on April 23, 2003. The following nominees for
members of the Board of Supervisors were elected for terms expiring at the 2006
Tri-Annual Meeting of the Limited Partners of Suburban Propane Partners, L.P.,
with the following number of votes for and withheld:
Nominated Member For Withheld
------------ ------------
Harold R. Logan, Jr............................. 23,266,403 194,361
Dudley C. Mecum ................................ 23,239,036 221,728
John Hoyt Stookey .............................. 23,235,755 225,009
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification of the President and Chief Executive Officer Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of the Vice President - Finance Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 Certification of the President and Chief Executive Officer Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of the Vice President - Finance 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
No reports were filed on Form 8-K.
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.
AUGUST 12, 2003 /S/ ROBERT M. PLANTE
- --------------- --------------------
Date Robert M. Plante
Vice President - Finance
(Principal Financial Officer)
AUGUST 12, 2003 /S/ MICHAEL A. STIVALA
- --------------- ----------------------
Date Michael A. Stivala
Controller
(Principal Accounting Officer)