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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended September 27, 2003
Commission File Number: 1-14222
SUBURBAN PROPANE PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
Delaware 22-3410353
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
240 Route 10 West
Whippany, NJ 07981
(973) 887-5300
(Address, including zip code, and telephone
number, including area code, of registrant's
principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Units New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K. [X]
Indicate by check mark whether registrant is an accelerated filer (as defined in
Rule 12b-2 of the Securities Exchange Act of 1934). Yes [X] No [ ]
The aggregate market value as of November 21, 2003 of the registrant's Common
Units held by non-affiliates of the registrant, based on the reported closing
price of such units on the New York Stock Exchange on such date ($31.17 per
unit), was approximately $847,035,000. As of November 21, 2003 there were
27,266,767 Common Units outstanding.
Documents Incorporated by Reference: None
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SUBURBAN PROPANE PARTNERS, L.P. AND SUBSIDIARIES
INDEX TO ANNUAL REPORT ON FORM 10-K
PART I Page
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ITEM 1. BUSINESS......................................................... 1
ITEM 2. PROPERTIES....................................................... 7
ITEM 3. LEGAL PROCEEDINGS................................................ 8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............. 8
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S UNITS AND RELATED
UNITHOLDER MATTERS............................................... 9
ITEM 6. SELECTED FINANCIAL DATA..........................................10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................13
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK......................................................26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................28
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE..............................31
ITEM 9A.CONTROLS AND PROCEDURES..........................................31
PART III
ITEM 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...............32
ITEM 11.EXECUTIVE COMPENSATION...........................................35
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT...................................................40
ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................41
ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICES...........................41
PART IV
ITEM 15.EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K..............................................42
Signatures...................................................................43
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
- -----------------------------------------------
This Annual Report on Form 10-K 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 and economic instability of the oil producing nations and
other general economic conditions;
o The ability of the Partnership to retain customers;
o The impact of energy efficiency and technology advances on the demand for
propane;
o The ability of management to continue to control expenses;
o The impact of regulatory developments on the Partnership's business;
o The impact of legal proceedings on the Partnership's business;
o The Partnership's ability to implement its expansion strategy into new
business lines and sectors;
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 Annual 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 Annual Report and in future SEC reports.
PART I
ITEM 1. BUSINESS
GENERAL
Suburban Propane Partners, L.P. (the "Partnership"), a publicly traded
Delaware limited partnership is principally engaged, through its operating
partnership and subsidiaries, in the retail and wholesale marketing of propane
and related appliances, parts and services. Based on LP/Gas Magazine dated
February 2003, we believe we are the third largest retail marketer of propane in
the United States, serving approximately 750,000 active residential, commercial,
industrial and agricultural customers through approximately 320 customer service
centers in 40 states as of September 27, 2003. Our operations are concentrated
primarily in the east and west coast regions of the United States. Our retail
propane sales volume was approximately 491.5 million gallons during the year
ended September 27, 2003. In addition, we sold approximately 31.7 million
gallons of propane at wholesale to large industrial end-users and other propane
distributors during the fiscal year. Based on industry statistics contained in
2001 Sales of Natural Gas Liquids and Liquefied Refinery Gases, as published by
the American Petroleum Institute in November 2002, our sales volume accounted
for approximately 4.4% of the domestic retail market for propane during the year
2001.
We conduct our business principally through Suburban Propane, L.P., a
Delaware limited partnership (the "Operating Partnership"). Our general partner
is Suburban Energy Services Group LLC (the "General Partner"), a Delaware
limited liability company owned by members of our senior management. The General
Partner owns a combined 1.71% general partner interest in the Partnership and
the Operating Partnership and the Partnership owns all of the limited
partnership interests in the Operating Partnership. The Partnership and the
Operating Partnership commenced operations on March 5, 1996 upon consummation of
an initial public offering of common units representing limited partner
interests in the Partnership ("Common Units") and the private placement of $425
million aggregate principal amount of Senior Notes. Suburban Sales and Service,
Inc. (the "Service Company"), a subsidiary of the Operating Partnership, was
formed at that time to operate the service work and appliance and propane
equipment parts businesses of the Partnership.
Other subsidiaries of the Operating Partnership include Gas Connection,
Inc. (doing business as HomeTown Hearth & Grill), Suburban @ Home ("Suburban @
Home"), and Suburban Franchising, Inc. ("Suburban Franchising"). HomeTown Hearth
& Grill sells and installs natural gas and propane gas grills, fireplaces and
related accessories and supplies through twelve retail stores in the south,
northeast and northwest regions as of September 27, 2003; Suburban @ Home sells,
installs, services and repairs a full range of heating and air conditioning
products through five retail locations in the south, northeast and northwest
regions as of September 27, 2003; and Suburban Franchising creates and develops
propane related franchising business opportunities.
In this Annual Report, unless otherwise indicated, the terms "Partnership,"
"we," "us," and "our" are used to refer to Suburban Propane Partners, L.P. or to
Suburban Propane Partners, L.P. and its consolidated subsidiaries, including the
Operating Partnership.
We currently file Annual Reports on Form 10-K, Quarterly Reports on Form
10-Q and current reports on Form 8-K with the Securities and Exchange Commission
("SEC"). The public may read and copy any materials that we file with the SEC at
the SEC's Public Reference Room at 450 Fifth Street, N. W., Washington, D.C.
20549. The public may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. Any information filed by us
is also available on the SEC's EDGAR database at www.sec.gov.
Upon written request or through a link from our website at
www.suburbanpropane.com, we will provide, without charge, copies of our Annual
Report on Form 10-K for the fiscal year ended September 27, 2003, each of the
Quarterly Reports on Form 10-Q, current reports filed or furnished on Form 8-K
and all amendments to such reports as soon as is reasonably practicable after
such reports are electronically filed with or furnished to the
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SEC. Requests should be directed to: Suburban Propane Partners, L.P., Investor
Relations, P.O. Box 206, Whippany, New Jersey 07981-0206.
RECENT DEVELOPMENTS
On November 10, 2003, we entered into an asset purchase agreement (the
"Purchase Agreement") to acquire substantially all of the assets and operations
of Agway Energy Products, LLC, Agway Energy Services PA, Inc. and Agway Energy
Services, Inc. (collectively "Agway Energy"), all of which entities are wholly
owned subsidiaries of Agway, Inc., for $206.0 million in cash, subject to
certain purchase price adjustments. Agway Energy, based in Syracuse, New York,
is a leading regional marketer of propane, fuel oil, gasoline and diesel fuel
primarily in New York, Pennsylvania, New Jersey and Vermont. Based on LP/Gas
Magazine dated February 2003, Agway Energy is the eighth largest retail propane
marketer in the United States, operating through approximately 139 distribution
and sales centers. Agway Energy is also one of the leading marketers and
distributors of fuel oil in the northeast region of the United States. To
complement its core marketing and delivery business, Agway Energy installs and
services a wide variety of home comfort equipment, particularly in the area of
heating, ventilation and air conditioning ("HVAC"). Additionally, to a lesser
extent, Agway Energy markets natural gas and electricity in New York and
Pennsylvania. For its fiscal year ended June 30, 2003, Agway Energy served more
than 400,000 active customers across all of its lines of business and sold
approximately 106.3 million gallons of propane and approximately 356.8 million
gallons of fuel oil, gasoline and diesel fuel to retail customers for
residential, commercial and agricultural applications. See additional discussion
in Note 15 to the Consolidated Financial Statements included in this Annual
Report.
Agway Energy is comprised of three wholly-owned subsidiaries of Agway, Inc.
Agway, Inc. is presently a debtor-in-possession under Chapter 11 of the
Bankruptcy Code in a bankruptcy proceeding pending before the United States
Bankruptcy Court for the Northern District of New York (the "Bankruptcy Court").
Agway Energy is not a Chapter 11 debtor. The Purchase Agreement was filed with
the Bankruptcy Court and on November 24, 2003, the Bankruptcy Court approved
Agway, Inc.'s motion to establish bid procedures for the sale. Under the
Bankruptcy Court order, we were officially designated the "stalking horse"
bidder in a process in which additional bids for the Agway Energy assets and
business operations are being solicited for a specified period of time. An
auction is currently scheduled for December 18, 2003. If we are the successful
bidder at the auction, the closing on the sale under the Purchase Agreement is
expected to occur shortly following the conclusion of the auction process and
upon receipt of necessary regulatory approvals. There can be no assurance that
we will ultimately be the successful bidder at the auction or will be able to
consummate the acquisition of Agway Energy.
In line with our business strategy, this acquisition, once consummated,
will expand our presence in the northeast retail propane market. Additionally,
Agway Energy's extensive presence in the northeast fuel oil delivery business
expands our product offerings in the attractive northeast energy market and
provides an opportunity to leverage our existing management expertise and
technology to enhance operational efficiencies within the Agway Energy business.
The HVAC business of Agway Energy is more mature than our Suburban @ Home
operations and is expected to provide an opportunity to accelerate the growth in
this business, as well as to enhance the overall service offering to our
existing customer base in the northeast.
BUSINESS STRATEGY
Our business strategy is to deliver increasing value to our unitholders
through initiatives, both internal and external, that are geared toward
achieving sustainable profitable growth and increased quarterly distributions.
We pursue this business strategy through a combination of (i) an internal focus
on enhancing customer service, growing and retaining our customer base and
improving the efficiency of operations and, (ii) acquisitions of businesses to
complement or supplement our core propane operations.
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Over the past several years, we have focused on improving the efficiency of
our operations and our cost structure, strengthening our balance sheet and
distribution coverage and building a platform for growth. We continue to pursue
internal growth of our existing propane operations and to foster the growth of
related retail and service operations that can benefit from our infrastructure
and national presence. We invest in enhancements to our technology
infrastructure to increase operating efficiencies and to develop marketing
programs and incentive compensation arrangements focused on customer growth and
retention. We measure and reward the success of our customer service centers
based on a combination of profitability of the individual customer service
center, customer growth and satisfaction statistics and asset utilization
measures. Additionally, we continuously evaluate our existing facilities to
identify opportunities to optimize our return on assets by selectively divesting
operations in slower growing markets and seek to reinvest in markets that
present more opportunities for growth.
In addition to our internal growth strategies, we have evaluated several
acquisition opportunities both within the propane sector, as well as in other
energy-related businesses in an effort to accelerate our overall growth
strategy. Our acquisition strategy is to focus on businesses with a relatively
steady cash flow that will either extend our presence in strategically
attractive propane markets, complement our existing network of propane
operations or provide an opportunity to diversify our operations with other
energy-related assets. In this regard, as further discussed above, we believe
that the pending acquisition of the assets of Agway Energy would significantly
enhance our position in the northeast propane market and expand our product and
service offerings to further support our overall growth objectives.
INDUSTRY BACKGROUND AND COMPETITION
Propane is a by-product of natural gas processing and petroleum refining.
It is a clean-burning energy source recognized for its transportability and ease
of use relative to alternative forms of stand-alone energy sources. Retail
propane use falls into three broad categories: (i) residential and commercial
applications, (ii) industrial applications and (iii) agricultural uses. In the
residential and commercial markets, propane is used primarily for space heating,
water heating, clothes drying and cooking. Industrial customers use propane
generally as a motor fuel burned in internal combustion engines that power
over-the-road vehicles, forklifts and stationary engines, to fire furnaces, as a
cutting gas and in other process applications. In the agricultural market,
propane is primarily used for tobacco curing, crop drying, poultry brooding and
weed control.
Propane is extracted from natural gas or oil wellhead gas at processing
plants or separated from crude oil during the refining process. Propane is
normally transported and stored in a liquid state under moderate pressure or
refrigeration for ease of handling in shipping and distribution. When the
pressure is released or the temperature is increased, it becomes a flammable gas
that is colorless and odorless with an odorant added to allow for its detection.
Propane is clean burning, and when consumed produces only negligible amounts of
pollutants.
Based upon information provided by the National Propane Gas Association and
the Energy Information Administration, propane accounts for approximately 4% of
household energy consumption in the United States. This level has not changed
materially over the previous two decades. As an energy source, propane competes
primarily with electricity, natural gas and fuel oil, principally on the basis
of price, availability and portability.
Propane is more expensive than natural gas on an equivalent British Thermal
Unit basis in locations serviced by natural gas, but it is an alternative to
natural gas in rural and suburban areas where natural gas is unavailable or
portability of product is required. Historically, the expansion of natural gas
into traditional propane markets has been inhibited by the capital costs
required to expand pipeline and retail distribution systems. Although the recent
extension of natural gas pipelines to previously unserved geographic areas tends
to displace propane distribution in areas affected, new opportunities for
propane sales have been arising as new neighborhoods are developed in
geographically remote areas. Propane is generally less expensive to use than
electricity for space heating, water heating, clothes drying and cooking. Fuel
oil has not been a significant competitor due to the current geographical
diversity of our operations, and propane and fuel oil compete to a lesser extent
because of the cost of converting
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from one to the other.
In addition to competing with suppliers of other sources or energy, we
compete with other retail propane distributors. Competition in the retail
propane industry is highly fragmented and generally occurs on a local basis with
other large full-service multi-state propane marketers, thousands of smaller
local independent marketers and farm cooperatives. Based on industry statistics
contained in 2001 Sales of Natural Gas Liquids and Liquified Refinery Gases, as
published by the American Petroleum Institute in November 2002, and LP/Gas
Magazine dated February 2003, the ten largest retailers, including us, account
for approximately 29% of the total retail sales of propane in the United States,
no single marketer has a greater than 10% share of the total retail market in
the United States and our sales volume accounted for approximately 4.4% of the
domestic retail market for propane during 2001. Most of our customer service
centers compete with five or more marketers or distributors. However, each of
our customer service centers operates in its own competitive environment because
retail marketers tend to locate in close proximity to customers in order to
lower the cost of providing service. Our typical customer service center has an
effective marketing radius of approximately 50 miles, although in certain rural
areas the marketing radius may be extended by a satellite office.
PRODUCTS, SERVICES AND MARKETING
We distribute propane through a nationwide retail distribution network
consisting of approximately 320 customer service centers in 40 states as of
September 27, 2003. Our operations are concentrated in the east and west coast
regions of the United States. In fiscal 2003, we serviced approximately 750,000
active customers. Approximately two-thirds of our retail propane volume has
historically been sold during the six month peak heating season from October
through March, as many customers use propane for heating purposes. Typically,
customer service centers are found in suburban and rural areas where natural gas
is not readily available. Generally, such locations consist of an office,
appliance showroom, warehouse and service facilities, with one or more 18,000 to
30,000 gallon storage tanks on the premises. Most of our residential customers
receive their propane supply pursuant to an automatic delivery system that
eliminates the customer's need to make an affirmative purchase decision. From
our customer service centers, we also sell, install and service equipment
related to our propane distribution business, including heating and cooking
appliances, hearth products and supplies and, at some locations, propane fuel
systems for motor vehicles.
We sell propane primarily to six customer markets: residential, commercial,
industrial (including engine fuel), agricultural, other retail users and
wholesale. Approximately 94% of the gallons sold by us in fiscal 2003 were to
retail customers: 41% to residential customers, 30% to commercial customers, 10%
to industrial customers, 6% to agricultural customers and 13% to other retail
users. The balance of approximately 6% of the gallons sold by us in fiscal 2003
was for risk management activities and wholesale customers. Sales to residential
customers in fiscal 2003 accounted for approximately 59% of our margins on
propane sales, reflecting the higher-margin nature of the residential market. No
single customer accounted for 10% or more of our revenues during fiscal 2003.
Retail deliveries of propane are usually made to customers by means of
bobtail and rack trucks. Propane is pumped from the bobtail truck, with
capacities ranging from 2,125 gallons to 2,975 gallons of propane, into a
stationary storage tank on the customer's premises. The capacity of these
storage tanks ranges from approximately 100 gallons to approximately 1,200
gallons, with a typical tank having a capacity of 300 to 400 gallons. We also
deliver propane to retail customers in portable cylinders, which typically have
a capacity of 5 to 35 gallons. When these cylinders are delivered to customers,
empty cylinders are refilled in place or transported for replenishment at our
distribution locations. We also deliver propane to certain other bulk end users
of propane in larger trucks known as transports (which have an average capacity
of approximately 9,000 gallons). End-users receiving transport deliveries
include industrial customers, large-scale heating accounts, such as local gas
utilities that use propane as a supplemental fuel to meet peak load
deliverability requirements, and large agricultural accounts that use propane
for crop drying. Propane is generally transported from refineries, pipeline
terminals, storage facilities (including our storage facilities in Elk Grove,
California and Tirzah, South Carolina), and coastal terminals to our customer
service centers by a combination of common carriers, owner-operators and
railroad tank cars. See additional discussion in Item 2 of this Annual Report.
4
In our wholesale operations, we principally sell propane to large
industrial end-users and other propane distributors. The wholesale market
includes customers who use propane to fire furnaces, as a cutting gas and in
other process applications. Due to the low margin nature of the wholesale market
as compared to the retail market, we have selectively reduced our emphasis on
wholesale marketing over the last few years. Accordingly, sales of wholesale
gallons during fiscal 2003 decreased in comparison to fiscal 2002, which also
decreased from fiscal 2001.
PROPANE SUPPLY
Our propane supply is purchased from nearly 70 oil companies and natural
gas processors at approximately 180 supply points located in the United States
and Canada. We make purchases primarily under one-year agreements that are
subject to annual renewal, but also purchase propane on the spot market. Supply
contracts generally provide for pricing in accordance with posted prices at the
time of delivery or the current prices established at major storage points, and
some contracts include a pricing formula that typically is based on prevailing
market prices. Some of these agreements provide maximum and minimum seasonal
purchase guidelines. We use a number of interstate pipelines, as well as
railroad tank cars and delivery trucks to transport propane from suppliers to
storage and distribution facilities.
Historically, supplies of propane from our supply sources have been readily
available. Although we make no assurance regarding the availability of supplies
of propane in the future, we currently expect to be able to secure adequate
supplies during fiscal 2004. During fiscal 2003, Dynegy Liquids Marketing and
Trade ("Dynegy") and Enterprise Products Operating L.P. ("Enterprise") provided
approximately 21% and 13%, respectively, of our total domestic propane supply.
The availability of our propane supply is dependent on several factors,
including the severity of winter weather and the price and availability of
competing fuels such as natural gas and heating oil. We believe that, if
supplies from Dynegy or Enterprise were interrupted, we would be able to secure
adequate propane supplies from other sources without a material disruption of
our operations. Nevertheless, the cost of acquiring such propane might be higher
and, at least on a short-term basis, margins could be affected. Aside from these
two suppliers, no single supplier provided more than 10% of our total domestic
propane supply fiscal 2003. During that year, approximately 98% of our total
propane purchases were from domestic suppliers.
We seek to reduce the effect of propane 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 transactions on the New York
Mercantile Exchange and to forward and option contracts with various third
parties to purchase and sell product at fixed prices in the future. These
activities are monitored by our senior management through enforcement of our
commodity trading policy. See additional discussion in Item 7A of this Annual
Report.
We operate large propane storage facilities in California and South
Carolina. We also operate smaller storage facilities in other locations and have
rights to use storage facilities in additional locations. As of September 27,
2003, the majority of the storage capacity in California and South Carolina was
leased to third parties. Our storage facilities enable us to buy and store large
quantities of propane during periods of low demand and lower prices, which
generally occur during the summer months. This practice helps ensure a more
secure supply of propane during periods of intense demand or price instability.
TRADEMARKS AND TRADENAMES
We utilize a variety of trademarks and tradenames owned by us, including
"Suburban Propane," "Gas Connection," and "Suburban @ Home." We regard our
trademarks, tradenames and other proprietary rights as valuable assets and
believe that they have significant value in the marketing of our products.
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GOVERNMENT REGULATION; ENVIRONMENTAL AND SAFETY MATTERS
We are subject to various federal, state and local environmental, health
and safety laws and regulations. Generally, these laws impose limitations on the
discharge of pollutants and establish standards for the handling of solid and
hazardous wastes and can require the investigation and cleanup of environmental
contamination. These laws include the Resource Conservation and Recovery Act,
the Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), the Clean Air Act, the Occupational Safety and Health Act, the
Emergency Planning and Community Right to Know Act, the Clean Water Act and
comparable state statutes. CERCLA, also known as the "Superfund" law, imposes
joint and several liability without regard to fault or the legality of the
original conduct on certain classes of persons that are considered to have
contributed to the release or threatened release of a "hazardous substance" into
the environment. Propane is not a hazardous substance within the meaning of
CERCLA. However, we own real property at locations where such hazardous
substances may exist as a result of prior activities.
National Fire Protection Association Pamphlets No. 54 and No. 58, which
establish rules and procedures governing the safe handling of propane, or
comparable regulations, have been adopted, in whole, in part or with state
addenda, as the industry standard in all of the states in which we operate. In
some states these laws are administered by state agencies, and in others they
are administered on a municipal level. Pamphlet No. 58 has adopted storage tank
valve retrofit requirements due to be complete by June 2011. A program is in
place to meet the deadline.
With respect to the transportation of propane by truck, we are subject to
regulations promulgated under the Federal Motor Carrier Safety Act. These
regulations cover the transportation of hazardous materials and are administered
by the United States Department of Transportation or similar state agency. We
conduct ongoing training programs to help ensure that our operations are in
compliance with applicable safety regulations. We maintain various permits that
are necessary to operate some of our facilities, some of which may be material
to our operations. We believe that the procedures currently in effect at all of
our facilities for the handling, storage and distribution of propane are
consistent with industry standards and are in compliance, in all material
respects, with applicable laws and regulations.
The Department of Transportation has established regulations addressing
emergency discharge control issues. The regulations, which became effective as
of July 1, 1999, required us to modify the inspection and record keeping
procedures for our cargo tank vehicles. A schedule of compliance is set forth
within the regulations. We have implemented the required discharge control
systems and comply, in all material respects, with current regulatory
requirements.
Future developments, such as stricter environmental, health or safety laws
and regulations thereunder, could affect our operations. We do not anticipate
that the cost of our compliance with environmental, health and safety laws and
regulations, including CERCLA, will have a material adverse effect on our
financial condition or results of operations. To the extent that there are any
environmental liabilities unknown to us or environmental, health or safety laws
or regulations are made more stringent, there can be no assurance that our
financial condition or results of operations will not be materially and
adversely affected.
EMPLOYEES
As of September 27, 2003, we had approximately 2,973 full time employees,
of whom 285 were engaged in general and administrative activities (including
fleet maintenance), 29 were engaged in transportation and product supply
activities and 2,659 were customer service center employees. As of September 27,
2003, 145 of our employees were represented by 10 different local chapters of
labor unions. We believe that our relations with both our union and non-union
employees are satisfactory. From time to time, we hire temporary workers to meet
peak seasonal demands.
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ITEM 2. PROPERTIES
As of September 27, 2003, we owned approximately 70% of our customer
service center and satellite locations and leased the balance of our retail
locations from third parties. We own and operate a 22 million gallon
refrigerated, above-ground propane storage facility in Elk Grove, California and
a 60 million gallon underground propane storage cavern in Tirzah, South
Carolina. Additionally, we own our principal executive offices located in
Whippany, New Jersey.
The transportation of propane requires specialized equipment. The trucks
and railroad tank cars utilized for this purpose carry specialized steel tanks
that maintain the propane in a liquefied state. As of September 27, 2003, we had
a fleet of seven transport truck tractors, of which we owned five, and 251
railroad tank cars, all of which we leased. In addition, as of September 27,
2003 we used 1,148 bobtail and rack trucks, of which we owned approximately 27%,
and 1,339 other delivery and service vehicles, of which we owned approximately
29%. Vehicles that are not owned by us are leased. As of September 27, 2003, we
also owned approximately 771,679 customer storage tanks with typical capacities
of 100 to 500 gallons, 37,370 customer storage tanks with typical capacities of
over 500 gallons and 137,682 portable cylinders with typical capacities of five
to ten gallons.
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ITEM 3. LEGAL PROCEEDINGS
LITIGATION
Our operations are subject to all operating hazards and risks normally
incidental to handling, storing, and delivering combustible liquids such as
propane. As a result, we have been, and will continue to be, a defendant in
various legal proceedings and litigation arising in the ordinary course of
business. We are self-insured for general and product, workers' compensation and
automobile liabilities up to predetermined amounts above which third party
insurance applies. We believe that the self-insured retentions and coverage we
maintain are reasonable and prudent. Although any litigation is inherently
uncertain, based on past experience, the information currently available to us,
and the amount of our self-insurance reserves for known and unasserted
self-insurance claims (which was approximately $28.6 million at September 27,
2003), we do not believe that these pending or threatened litigation matters, or
known claims or known contingent claims, will have a material adverse effect on
our results of operations, financial condition or our cash flow.
On May 23, 2001, Heritage Propane Partners, L.P. ("Heritage") amended a
complaint it had filed on November 30, 1999 in the South Carolina Court of
Common Pleas, Fifth Judicial Circuit, against SCANA Corporation ("SCANA") and
Cornerstone Ventures, L.P. ("Cornerstone") to name our Operating Partnership as
a defendant (Heritage v. SCANA et al., Civil Action 0l-CP-40-3262). Third party
insurance and the self-insurance reserves referenced above do not apply to this
action. The amended complaint alleges, among other things, that SCANA breached a
contract for the sale of propane assets and asserts claims against our Operating
Partnership for wrongful interference with prospective advantage and civil
conspiracy for allegedly interfering with Heritage's prospective contract with
SCANA. Heritage claims that it is entitled to recover its alleged lost profits
in the amount of $125.0 million and that all defendants are jointly and
severally liable to it for such amount. Our Operating Partnership moved to
dismiss the claims asserted against it for failure to state a claim. On October
24, 2001, the court denied our Operating Partnership's motion to dismiss the
amended complaint.
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. On May 5, 2003, our Operating Partnership filed a motion for
summary judgement to dismiss the claims asserted against it in the original
complaint filed against our Operating Partnership. We withdrew this motion for
strategic reasons but intend to re-file it at a later date. However, we cannot
predict the outcome of this motion for summary judgement. Discovery is ongoing
between all parties to the lawsuit. We do not anticipate that this matter will
be tried before the Spring of 2004. We believe that the claims and proposed
additional claims against our Operating Partnership are without merit and are
defending the action vigorously. If this matter proceeds to trial, we cannot
predict the outcome of this trial, or , if the trial is before a jury, what
verdict the jury ultimately may reach.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
8
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S UNITS AND RELATED UNITHOLDER MATTERS
Our Common Units, representing limited partner interests in the
Partnership, are listed and traded on the New York Stock Exchange ("NYSE") under
the symbol SPH. As of November 21, 2003, there were 982 Common Unitholders of
record. The following table presents, for the periods indicated, the high and
low sales prices per Common Unit, as reported on the NYSE, and the amount of
quarterly cash distributions declared and paid per Common Unit with respect to
each quarter.
Common Unit Price Range
------------------------ Cash Distribution
High Low Paid
----------- ----------- -----------------
Fiscal 2002
-----------
First Quarter $ 27.99 $ 24.50 $ 0.5625
Second Quarter 28.40 24.36 0.5625
Third Quarter 28.25 25.59 0.5750
Fourth Quarter 28.49 20.00 0.5750
Fiscal 2003
-----------
First Quarter $ 28.49 $ 24.60 $ 0.5750
Second Quarter 29.60 26.90 0.5750
Third Quarter 29.89 27.40 0.5875
Fourth Quarter 30.95 27.91 0.5875
We make quarterly distributions to our partners in an aggregate amount
equal to our Available Cash (as defined in the Second Amended and Restated
Partnership Agreement) with respect to such quarter. Available Cash generally
means all cash on hand at the end of the fiscal quarter plus all additional cash
on hand as a result of borrowings subsequent to the end of such quarter less
cash reserves established by the Board of Supervisors in its reasonable
discretion for future cash requirements.
We are a publicly traded limited partnership and are not subject to federal
income tax. Instead, Unitholders are required to report their allocable share of
our earnings or loss, regardless of whether we make distributions.
9
ITEM 6. SELECTED FINANCIAL DATA
The following table presents our selected consolidated historical financial
data. The selected consolidated historical financial data is derived from our
audited financial statements. The amounts in the table below, except per unit
data, are in thousands.
Year Ended (a)
----------------------------------------------------------------------------
September September September September September
27, 2003 28, 2002 29, 2001 30, 2000 (b) 25, 1999
-------- -------- -------- ------------ ---------
STATEMENT OF OPERATIONS DATA
Revenues $ 771,679 $ 665,105 $ 931,536 $ 841,304 $ 620,207
Costs and expenses 691,662 582,321 838,055 770,332 547,579
Recapitalization costs (c) - - - - 18,903
Gain on sale of assets - - - (10,328) -
Gain on sale of storage facility - (6,768) - - -
Income before interest expense and
income taxes (d) 80,017 89,552 93,481 81,300 53,725
Interest expense, net 33,629 35,325 39,596 42,534 31,218
Provision for income taxes 202 703 375 234 68
Income from continuing operations (d) 46,186 53,524 53,510 38,532 22,439
Discontinued operations:
Gain on sale of customer service centers (e) 2,483 - - - -
Net income (d) 48,669 53,524 53,510 38,532 22,439
Income from continuing operations per Common
Unit - basic 1.78 2.12 2.14 1.70 0.83
Net income per Common Unit - basic (f) 1.87 2.12 2.14 1.70 0.83
Net income per Common Unit - diluted (f) 1.86 2.12 2.14 1.70 0.83
Cash distributions declared per unit $ 2.33 $ 2.28 $ 2.20 $ 2.11 $ 2.03
BALANCE SHEET DATA (END OF PERIOD)
Cash and cash equivalents $ 15,765 $ 40,955 $ 36,494 $ 11,645 $ 8,392
Current assets 98,912 116,789 124,339 122,160 78,637
Total assets 665,630 700,146 723,006 771,116 659,220
Current liabilities, excluding current portion of
long-term borrowings 94,802 98,606 119,196 124,585 99,953
Total debt 383,826 472,769 473,177 524,095 430,687
Other long-term liabilities 102,924 109,485 71,684 60,607 60,194
Partners' capital - Common Unitholders 165,950 103,680 105,549 58,474 66,342
Partner's capital - General Partner $ 1,567 $ 1,924 $ 1,888 $ 1,866 $ 2,044
STATEMENT OF CASH FLOWS DATA
Cash provided by/(used in)
Operating activities $ 57,300 $ 68,775 $ 101,838 $ 59,467 $ 81,758
Investing activities (4,859) (6,851) (17,907) (99,067) (12,241)
Financing activities $ (77,631) $ (57,463) $ (59,082) $ 42,853 $(120,944)
OTHER DATA
Depreciation and amortization (g) $ 27,520 $ 28,355 $ 36,496 $ 37,032 $ 34,453
EBITDA (h) 110,020 117,907 129,977 118,332 88,178
Capital expenditures (i)
Maintenance and growth 14,050 17,464 23,218 21,250 11,033
Acquisitions $ - $ - $ - $ 98,012 $ 4,768
Retail propane gallons sold 491,451 455,988 524,728 523,975 524,276
10
(a) Our 2000 fiscal year contained 53 weeks. All other fiscal years contained
52 weeks.
(b) Includes the results from our November 1999 acquisition of certain
subsidiaries of SCANA Corporation, accounted for under the purchase method,
from the date of acquisition.
(c) We incurred expenses of $18.9 million in connection with the
recapitalization transaction described in Note 1 to the consolidated
financial statements included in this Annual Report. These expenses
included $7.6 million representing cash expenses and $11.3 million
representing non-cash charges associated with the accelerated vesting of
restricted Common Units.
(d) These amounts include, in addition to the gain on sale of assets and the
gain on sale of storage facility, gains from the disposal of property,
plant and equipment of $0.6 million for fiscal 2003, $0.5 million for
fiscal 2002, $3.8 million for fiscal 2001, $1.0 million for fiscal 2000 and
$0.6 million for fiscal 1999.
(e) Gain on sale of customer service centers consists of nine customer service
centers we sold during 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
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.
(f) Basic net income per Common Unit is computed by dividing net income, after
deducting our general partner's interest, by the weighted average number of
outstanding Common Units. Diluted net income per Common Unit is computed by
dividing net income, after deducting our general partner's approximate 2%
interest, by the weighted average number of outstanding Common Units and
time vested restricted units granted under our 2000 Restricted Unit Plan.
(g) Depreciation and amortization expense for the year ended September 28, 2002
reflects our early adoption of SFAS No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142") as of September 30, 2001 (the beginning of our 2002
fiscal year). SFAS 142 eliminates the requirement to amortize goodwill and
certain intangible assets. Amortization expense for the year ended
September 28, 2002 reflects approximately $7.4 million lower amortization
expense compared to the year ended September 29, 2001 as a result of the
elimination of amortization expense associated with goodwill.
(h) EBITDA represents net income before deducting interest expense, income
taxes, depreciation and amortization. Our management uses EBITDA as a
measure of liquidity and we are including it because we believe that it
provides our investors and industry analysts with additional information to
evaluate our ability to meet our debt service obligations and to pay our
quarterly distributions to holders of our Common Units. Moreover, our
senior note agreements and our revolving credit agreement require us to use
EBITDA as a component in calculating our leverage and interest coverage
ratios. EBITDA is not a recognized term under generally accepted accounting
principles ("GAAP") and should not be considered as an alternative to net
income or net cash provided by operating activities determined in
accordance with GAAP. Because EBITDA as determined by us excludes some, but
not all, items that affect net income, it may not be comparable to EBITDA
or similarly titled measures used by other companies. The following table
sets forth (i) our calculation of EBITDA and (ii) a reconciliation of
EBITDA, as so calculated, to our net cash provided by operating activities
(amounts in thousands):
11
Fiscal Fiscal Fiscal Fiscal Fiscal
2003 2002 2001 2000 1999
------------- --------------- --------------- -------------- ---------------
Net income $ 48,669 $ 53,524 $ 53,510 $ 38,532 $ 22,439
Add:
Provision for income taxes 202 703 375 234 68
Interest expense, net 33,629 35,325 39,596 42,534 31,218
Depreciation and amortization 27,520 28,355 36,496 37,032 34,453
------------- --------------- --------------- -------------- ---------------
EBITDA 110,020 117,907 129,977 118,332 88,178
------------- --------------- --------------- -------------- ---------------
Add/(subtract):
Provision for income taxes (202) (703) (375) (234) (68)
Interest expense, net (33,629) (35,325) (39,596) (42,534) (31,218)
Gain on disposal of property, plant and
equipment, net (636) (546) (3,843) (11,313) (578)
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 (15,770) (5,790) 15,675 (4,784) 25,444
------------- --------------- --------------- -------------- ---------------
Net cash provided by/(used in)
Operating activities $ 57,300 $ 68,775 $ 101,838 $ 59,467 $ 81,758
============= =============== =============== ============== ===============
Investing activities $ (4,859) $ (6,851) $ (17,907) $ (99,067) $ (12,241)
============= =============== =============== ============== ===============
Financing activities $ (77,631) $ (57,463) $ (59,082) $ 42,853 $ (120,944)
============= =============== =============== ============== ===============
(i) Our capital expenditures fall generally into three categories: (i)
maintenance expenditures, which include expenditures for repair and
replacement of property, plant and equipment; (ii) growth capital
expenditures which include new propane tanks and other equipment to
facilitate expansion of our customer base and operating capacity; and (iii)
acquisition capital expenditures, which include expenditures related to the
acquisition of propane and other retail operations and a portion of the
purchase price allocated to intangible assets associated with such acquired
businesses.
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is a discussion of our financial condition and results of
operations, which should be read in conjunction with our historical consolidated
financial statements and notes thereto included elsewhere in this Annual Report.
Since our Operating Partnership and Service Company account for substantially
all of our assets, revenues and earnings, a separate discussion of results of
operations from our other subsidiaries is not presented.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains Forward-Looking Statements as
defined in the Private Securities Litigation Reform Act of 1995 relating to our
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 Cautionary Statements. The risks and uncertainties and their impact on
our 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 Our ability to compete with other suppliers of propane and other energy
sources;
o The impact on propane prices and supply from the political and economic
instability of the oil producing nations and other general economic
conditions;
o Our ability 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 our business;
o The impact of legal proceedings on our business;
o Our ability to implement our expansion strategy into new business lines and
sectors;
o Our ability to integrate acquired businesses successfully.
On different occasions, we or our representatives have made or may make
Forward-Looking Statements in other filings that we make with the SEC, in press
releases or in oral statements made by or with the approval of one of our
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. We undertake no obligation to update any
Forward-Looking or Cautionary Statement. All subsequent written and oral
Forward-Looking Statements attributable to us or persons acting on our behalf
are expressly qualified in their entirety by the Cautionary Statements in this
Annual 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
13
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 additional discussion in Item 7A of this Annual
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
benefit plans, 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
14
give rise to the revision become known to us.
Our significant accounting policies are summarized in Note 2, "Summary of
Significant Accounting Policies," included within the Notes to Consolidated
Financial Statements section elsewhere in this Annual Report. 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. We estimate our allowance for doubtful accounts using a
specific reserve for known or anticipated uncollectible accounts, as well as a
general reserve for potential future uncollectible accounts taking into
consideration our historical write-offs. If the financial condition of one or
more of our customers were to deteriorate resulting in an impairment in their
ability to make payments, additional allowances could be required.
PENSION AND OTHER POSTRETIREMENT BENEFITS. We estimate the rate of return on
plan assets, the discount rate to estimate the present value of future benefit
obligations and the cost of future health care benefits in determining our
annual pension and other postretirement benefit costs. In accordance with
generally accepted accounting principles, actual results that differ from our
assumptions are accumulated and amortized over future periods and therefore,
generally affect our recognized expense and recorded obligation in such future
periods. While we believe that our assumptions are appropriate, significant
differences in our actual experience or significant changes in market conditions
may materially affect our pension and other postretirement obligations and our
future expense. See "Pension Plan Assets" below 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 historical claims data.
GOODWILL IMPAIRMENT ASSESSMENT. We assess the carrying value of goodwill at a
reporting unit level, at least annually, based on an estimate of the fair value
of the respective reporting unit. Fair value of the reporting unit is estimated
using either (i) a market value approach taking into consideration the quoted
market price of our Common Units; or (ii) discounted cash flow analyses taking
into consideration estimated cash flows in a ten-year projection period and a
terminal value calculation at the end of the projection period.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. See Item 7A of this Annual Report
for additional information about accounting for derivative instruments and
hedging activities.
15
RESULTS OF OPERATIONS
FISCAL YEAR 2003 COMPARED TO FISCAL YEAR 2002
- ----------------------------------------------
REVENUES. Revenues increased 16.0%, or $106.6 million, to $771.7 million in
fiscal 2003 compared to $665.1 million in fiscal 2002. Revenues from retail
propane activities increased $130.0 million, or 24.3%, to $664.2 million in
fiscal 2003 compared to $534.2 million in the prior year. This increase was the
result of an increase in average propane selling prices, coupled with an
increase in retail gallons sold. Propane selling prices averaged 15.9% higher in
fiscal 2003 compared to the prior year as a result of steadily increasing costs
of propane throughout the first half of fiscal 2003 which remained higher during
the second half of the year. Retail gallons sold increased 35.5 million gallons,
or 7.8%, to 491.5 million gallons in fiscal 2003 compared to 456.0 million
gallons in fiscal 2002 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 the National Oceanic and
Atmospheric Administration ("NOAA"), averaged 1% colder than normal in fiscal
2003 compared to 13% warmer than normal temperatures in the prior year, or 14%
colder conditions year-over-year. The coldest weather conditions, however, were
experienced in the eastern and central regions of the United States. In the
west, average temperatures were 10% warmer than normal during fiscal 2003,
compared to 7% warmer than normal during the prior year. In addition, 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 $16.6 million in
fiscal 2003 decreased $19.5 million, or 54.0%, compared to revenues of $36.1
million in the prior year primarily as a result of lower volumes sold in the
wholesale market in line with our strategy to reduce our emphasis on wholesale
activities. Revenue from other sources, including sales of appliances and
related parts and services, of $90.9 million in fiscal 2003 decreased $3.9
million, or 4.1%, compared to other revenue in the prior year of $94.8 million.
The decrease in other revenues was primarily attributable to lower revenues from
service and installations.
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 $87.7 million, or 30.3%, to $376.8 million
in fiscal 2003 compared to $289.1 million in the prior year. The increase
results primarily from a $93.0 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 in fiscal 2003 compared to the prior year, coupled with the
aforementioned increase in retail volumes sold resulting in an increase of $17.0
million; offset by a $21.2 million decrease from the decline in wholesale and
risk management activities described above. In fiscal 2003, cost of products
sold represented 48.8% of revenues compared to 43.5% in the prior year. 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 second half of fiscal 2003 compared
to steadily declining product costs in the prior year.
OPERATING EXPENSES. All 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
7.1%, or $16.6 million, to $250.7 million in fiscal 2003 compared to $234.1
million in fiscal 2002. Operating expenses in fiscal 2003 include a $1.5 million
unrealized (non-cash) loss representing the net change in fair
16
values of derivative instruments, compared to a $5.4 million unrealized
(non-cash) gain in the prior year (see Item 7A - Quantitative and Qualitative
Disclosures About Market Risk for information on our policies regarding the
accounting for derivative instruments). In addition to the $6.9 million non-cash
impact of changes in the fair value of derivative instruments year-over-year,
operating expenses increased $9.7 million primarily resulting from (i) $2.3
million increased pension costs, (ii) $2.2 million higher insurance costs, (iii)
$2.1 million higher costs to operate our fleet primarily from increased fuel
costs and (iv) $0.9 million higher employee compensation and benefits to support
the increased sales volume. 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. 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 $36.7 million for fiscal 2003 were $5.9 million, or
19.2%, higher than fiscal 2002 expenses of $30.8 million. The increase was
primarily attributable to the impact of $2.8 million higher employee
compensation and benefit related costs, as well as $1.2 million higher fees for
professional services in the current year period.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
decreased $0.9 million, or 3.2%, to $27.5 million in fiscal 2003, compared to
$28.4 in fiscal 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 $9.6 million, or 10.7%, to $80.0
million in fiscal 2003 compared to $89.6 million in the prior year. Earnings
before interest, taxes, depreciation and amortization ("EBITDA") amounted to
$110.0 million for fiscal 2003 compared to $117.9 million for the prior year, a
decline of $7.9 million, or 6.7%. The decline in income before interest expense
and income taxes and in EBITDA over the prior year reflects the impact of 7.8%
higher retail volumes sold, offset by the $6.9 million unfavorable impact of
mark-to-market activity on derivative instruments year-over-year included within
operating expenses, 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 fiscal 2003
EBITDA.
EBITDA represents net income before deducting interest expense, income
taxes, depreciation and amortization. Our management uses EBITDA as a measure of
liquidity and we are including it because we believe that it provides our
investors and industry analysts with additional information to evaluate our
ability to meet our debt service obligations and to pay our quarterly
distributions to holders of our Common Units. Moreover, our senior note
agreements and our revolving credit agreement require us to use EBITDA as a
component in calculating our leverage and interest coverage ratios. EBITDA is
not a recognized term under generally accepted accounting principles ("GAAP")
and should not be considered as an alternative to net income or net cash
provided by operating activities determined in accordance with GAAP. Because
EBITDA as determined by us excludes some, but not all, items that affect net
income, it may not be comparable to EBITDA or similarly titled measures used by
other companies. The following table sets forth (i) our calculation of EBITDA
and (ii) a reconciliation of EBITDA, as so calculated, to our net cash provided
by operating activities (amounts in thousands):
17
Year Ended
-------------------------------------------
September 27, September 28,
2003 2002
------------------ -------------------
Net income $ 48,669 $ 53,524
Add:
Provision for income taxes 202 703
Interest expense, net 33,629 35,325
Depreciation and amortization 27,520 28,355
------------------ -------------------
EBITDA 110,020 117,907
------------------ -------------------
Add/(subtract):
Provision for income taxes (202) (703)
Interest expense, net (33,629) (35,325)
Gain on disposal of property, plant and equipment, net (636) (546)
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 (15,770) (5,790)
------------------ -------------------
Net cash provided by/(used in)
Operating activities $ 57,300 $ 68,775
================== ===================
Investing activities $ (4,859) $ (6,851)
================== ===================
Financing activities $ (77,631) $ (57,463)
================== ===================
INTEREST EXPENSE. Net interest expense decreased $1.7 million, or 4.8%, to
$33.6 million in fiscal 2003 compared to $35.3 million in fiscal 2002. The
decrease in interest expense reflects the positive steps taken by us during the
third quarter of fiscal 2003 to lower our overall leverage, which resulted in an
$88.9 million reduction in debt, coupled with lower average interest rates on
outstanding borrowings under our Revolving Credit Agreement during the first and
second quarters of fiscal 2003.
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 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."
FISCAL YEAR 2002 COMPARED TO FISCAL YEAR 2001
- ---------------------------------------------
REVENUES. Revenues of $665.1 million in fiscal 2002 decreased $266.4
million, or 28.6%, compared to $931.5 million in fiscal 2001. Revenues from
retail propane activities decreased $219.2 million, or 29.1%, to $534.2 million
in fiscal 2002 compared to $753.4 million in fiscal 2001. This decrease is
principally due to a decrease in average selling prices, coupled with a decrease
in retail gallons sold. Average selling prices declined 18.4% as a result of a
significant decline in the commodity price of propane in fiscal 2002 compared to
the prior year. Retail gallons sold decreased 13.1%, or 68.7 million gallons, to
456.0 million gallons in fiscal 2002 compared to 524.7 million gallons in fiscal
2001. The decrease in volume was attributable to record warm weather conditions
which were most dramatic during the peak heating months of October through March
of fiscal 2002 as well as, to a lesser extent, the impact of the economic
recession on commercial and industrial customers' buying habits.
Nationwide temperatures during fiscal 2002 were 13% warmer than normal as
compared to temperatures that were 2% colder than normal during fiscal 2001, as
reported by NOAA. During the peak heating months of October 2001 through March
2002, temperatures nationwide were 13% warmer than normal as compared to 5%
colder than normal in the comparable period in fiscal 2001, as reported by NOAA.
Volumes from the components of our customer mix that are less weather sensitive
declined approximately 12% year-over-year.
18
Revenues from wholesale and risk management activities decreased $50.1
million, or 58.1%, to $36.1 million in fiscal 2002 compared to $86.2 million in
fiscal 2001. A less volatile commodity price environment for propane during
fiscal 2002 compared to fiscal 2001 resulted in reduced risk management
activities and lower volumes in the wholesale market. Revenue from other
sources, including sales of appliances and related parts and services, of $94.8
million in fiscal 2002 increased $2.9 million, or 3.2%, over fiscal 2001
revenues of $91.9 million.
COST OF PRODUCTS SOLD. Cost of products sold decreased $221.2 million, or
43.3%, to $289.1 million in fiscal 2002 compared to $510.3 million in fiscal
2001. The decrease results primarily from a $125.1 million impact from the
aforementioned decrease in the commodity price of propane resulting in a 36.3%
decrease in the average unit cost of propane during fiscal 2002 compared to
fiscal 2001. This is coupled with the aforementioned decrease in retail volumes
sold resulting in a decrease of $51.9 million, and a $45.4 million decrease from
the decline in wholesale and risk management activities described above. In
fiscal 2002, cost of products sold represented 43.5% of revenues compared to
54.8% in the prior year. The decrease in the cost of products sold as a
percentage of revenues relates primarily to steadily decreasing costs of propane
during fiscal 2002.
OPERATING EXPENSES. Operating expenses decreased 9.5%, or $24.6 million, to
$234.1 million in fiscal 2002 compared to $258.7 million in fiscal 2001.
Operating expenses for the year ended September 28, 2002 include a $5.4 million
unrealized (non-cash) gain representing the net change in fair values of
derivative instruments not designated as hedges, compared to a $3.1 million
unrealized loss in fiscal 2001 (see Item 7A of this Annual Report for
information on our policies regarding the accounting for derivative instruments
and hedging activities). In addition to the $8.5 million favorable impact from
changes in the fair value of derivative instruments year-over-year, operating
expenses decreased $16.1 million, or 6.3%, principally attributable to our
ability to reduce costs amidst declining volumes resulting from ongoing
initiatives to shift costs from fixed to variable, primarily in the areas of
employee compensation and benefits. The lower compensation costs of $10.5
million were offset, in part, by a $4.0 million increase in medical and dental
costs in fiscal 2002 compared to the prior year. Additionally, operating
expenses were favorably impacted by a $4.2 million decrease in provisions for
doubtful accounts and $3.0 million lower costs of operating our fleet, including
maintenance and fuel costs, in fiscal 2002 compared to fiscal 2001. Provisions
for doubtful accounts were higher in fiscal 2001 primarily as a result of the
generally higher selling price environment driven by the higher average propane
costs.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased $1.7 million, or 5.2%, to $30.8 million in fiscal 2002 compared to
$32.5 million in fiscal 2001, again attributable to a decrease in employee
compensation and benefit costs of $4.3 million, as well as to a $1.6 million
decrease in fees for professional services, partly offset by a $1.3 million
increase in telecommunication costs.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
decreased 22.2%, or $8.1 million, to $28.4 million in fiscal 2002 compared to
$36.5 million in the prior year primarily as a result of our decision to early
adopt SFAS 142 effective September 30, 2001 (the beginning of fiscal 2002),
which eliminated the requirement to amortize goodwill and certain intangible
assets. If SFAS 142 had been in effect at the beginning of the prior year,
fiscal 2001 net income would have improved by $7.4 million.
GAIN ON SALE OF STORAGE FACILITY. On January 31, 2002, we sold our 170
million gallon propane storage facility in Hattiesburg, Mississippi, which was
considered a non-strategic asset, for net cash proceeds of $8.0 million,
resulting in a gain on sale of approximately $6.8 million.
INCOME BEFORE INTEREST EXPENSE AND INCOME TAXES AND EBITDA. Income before
interest expense and income taxes decreased 4.2%, or $3.9 million, to $89.6
million compared to $93.5 million in the prior year. Earnings before interest,
taxes, depreciation and amortization ("EBITDA") decreased 9.3%, or $12.1
million, to $117.9 million in fiscal 2002 compared to $130.0 million in the
prior year. The decreases in income before interest expense and
19
income taxes and in EBITDA reflect the impact of the 13.1% lower retail volumes
sold in fiscal 2002 attributable to unseasonably warm heating season
temperatures and the economy; partially offset by (i) the $26.3 million, or
9.0%, decrease in combined operating and general and administrative expenses
described above, (ii) the impact of the $6.8 million gain on the sale of our
Hattiesburg, Mississippi storage facility and (iii) the impact on operating
expenses of changes in the fair value of derivative instruments described above.
In addition, if SFAS 142 had been in effect at the beginning of the prior year,
fiscal 2001 income before interest expense and income taxes would have improved
by $7.4 million.
EBITDA represents net income before deducting interest expense, income
taxes, depreciation and amortization. Our management uses EBITDA as a measure of
liquidity and we are including it because we believe that it provides our
investors and industry analysts with additional information to evaluate our
ability to meet our debt service obligations and to pay our quarterly
distributions to holders of our Common Units. Moreover, our senior note
agreements and our revolving credit agreement require us to use EBITDA as a
component in calculating our leverage and interest coverage ratios. EBITDA is
not a recognized term under generally accepted accounting principles ("GAAP")
and should not be considered as an alternative to net income or net cash
provided by operating activities determined in accordance with GAAP. Because
EBITDA as determined by us excludes some, but not all, items that affect net
income, it may not be comparable to EBITDA or similarly titled measures used by
other companies. The following table sets forth (i) our calculation of EBITDA
and (ii) a reconciliation of EBITDA, as so calculated, to our net cash provided
by operating activities (amounts in thousands):
Year Ended
------------------------------------------
September 28, September 29,
2002 2001
----------------- -----------------
Net income $ 53,524 $ 53,510
Add:
Provision for income taxes 703 375
Interest expense, net 35,325 39,596
Depreciation and amortization 28,355 36,496
----------------- -----------------
EBITDA 117,907 129,977
----------------- -----------------
Add/(subtract):
Provision for income taxes (703) (375)
Interest expense, net (35,325) (39,596)
Gain on disposal of property, plant and equipment, net (546) (3,843)
Gain on sale of storage facility (6,768) -
Changes in working capital and other assets and liabilities (5,790) 15,675
----------------- -----------------
Net cash provided by/(used in)
Operating activities $ 68,775 $ 101,838
================= =================
Investing activities $ (6,851) $ (17,907)
================= =================
Financing activities $ (57,463) $ (59,082)
================= =================
INTEREST INCOME AND INTEREST EXPENSE. Net interest expense decreased 10.9%,
or $4.3 million, to $35.3 million in fiscal 2002 compared to $39.6 million in
the prior year. This decrease is primarily attributable to reductions in average
amounts outstanding during fiscal 2002 under our Revolving Credit Agreement, as
well as lower average interest rates.
20
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. In fiscal 2003, net cash provided by operating activities
decreased $11.5 million, or 16.7%, to $57.3 million in fiscal 2003 compared to
$68.8 million in fiscal 2002. The decrease is primarily due to lower net income,
including lower non-cash items (principally depreciation, amortization and gains
on asset disposals), as well as the impact of increased investment in accounts
receivable and inventories resulting from higher commodity prices and increased
business activity during fiscal 2003 compared to fiscal 2002 due to generally
colder average temperatures.
In fiscal 2002, net cash provided by operating activities decreased $33.0
million, or 32.4%, to $68.8 million in fiscal 2002 compared to $101.8 million in
fiscal 2001. The decrease was primarily due to lower net income, including lower
non-cash items (principally depreciation, amortization and gains on asset
disposals), as well as the impact of unfavorable changes in working capital in
comparison to the prior year, principally reflecting lower compensation and
benefit accruals, offset by lower inventories.
Net cash used in investing activities was $4.9 million in fiscal 2003,
reflecting $14.1 million in capital expenditures (including $4.7 million for
maintenance expenditures and $9.4 million to support the growth of operations)
offset by net proceeds of $9.2 million from the sale of assets (including net
proceeds of $7.2 million from the sale of nine customer service centers). Net
cash used in investing activities was $6.9 million in fiscal 2002, reflecting
$17.5 million in capital expenditures (including $13.0 million for maintenance
expenditures and $4.5 million to support the growth of operations) offset by net
proceeds of $10.6 million from the sale of assets (including net proceeds of
$8.0 million resulting from the sale of our propane storage facility in
Hattiesburg, Mississippi). Net cash used in investing activities was $17.9
million in fiscal 2001, reflecting $23.2 million in capital expenditures
(including $6.5 million for maintenance expenditures and $16.7 million to
support the growth of operations), offset by net proceeds of $5.3 million from
the sale of property, plant and equipment.
Net cash used in financing activities for fiscal 2003 was $77.6 million,
reflecting (i) the payment of our quarterly distributions to our Common
Unitholders and our General Partner amounting to $60.1 million, (ii) the
repayment of all outstanding borrowings under our Revolving Credit Agreement
amounting to $46.0 million, (iii) the repayment of the second annual principal
payment of $42.5 million due under the 1996 Senior Note Agreement, and (iv) the
payment of $0.8 million in fees associated with the renewal and extension of our
Revolving Credit Agreement during May 2003. The $88.9 million reduction in debt
during fiscal 2003 was funded through a combination of cash provided by
operations and the net proceeds of $72.2 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 fiscal 2002
was $57.5 million, primarily reflecting the payment of quarterly distributions
to our Common Unitholders and our General Partner. Net cash used in financing
activities for fiscal 2001 was $59.1 million, reflecting repayments under our
Operating Partnership's Revolving Credit Agreement, as amended and restated
effective January 29, 2001 (the "Revolving Credit Agreement"), including a net
repayment of $44.0 million borrowed under the SCANA Acquisition facility and a
net repayment of $6.5 million borrowed under the net working capital facility,
and $54.5 million for payment of quarterly distributions to our Common
Unitholders and our General Partner, partly offset by net proceeds of $47.1
million from a public offering of approximately 2.4 million Common Units in
October 2000.
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,
21
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 $42.5 million due under the 1996 Senior Note Agreement, we elected to
repay this principal payment on June 30, 2003.
Our previous 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 an acquisition
facility of $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 0.375% to 0.50%, 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 September 27, 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 our 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 our 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 September 27, 2003 and at the end of each fiscal quarter for all periods
presented.
We will make distributions in an amount equal to all of our Available Cash,
as defined in the Second Amended and Restated Partnership Agreement,
approximately 45 days after the end of each fiscal quarter to holders of record
on the applicable record dates. The Board of Supervisors reviews the level of
Available Cash on a quarterly basis based upon information provided by
management. During each of the first three quarters of fiscal 2003, we paid
distributions to our Common Unitholders of $0.5750 per Common Unit. On July 24,
2003, the Board of Supervisors declared a $0.05 annualized increase in the
quarterly distribution from $0.5750 per Common Unit to $0.5875 per Common Unit,
or $2.35 on an annualized basis, for the third quarter of fiscal 2003, which was
paid on August 12, 2003. On October 23, 2003, the Board of Supervisors declared
a quarterly distribution of $0.5875 per Common Unit for the fourth quarter of
fiscal 2003, which was paid on November 10, 2003 to holders of record on
November 3, 2003.
Quarterly distributions include Incentive Distribution Rights ("IDRs")
payable to the General Partner to the extent the quarterly distribution exceeds
$0.55 per Common Unit. The IDRs represent an incentive for the General Partner
(which is owned by our management) 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
22
(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.
As discussed above, the results of operations for the fiscal year ended
September 27, 2003 were impacted by generally colder average temperatures
compared to fiscal 2002 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 effects 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. We took several steps during fiscal 2003 to further
strengthen our balance sheet and improve our leverage, highlighted by the
successful completion during the third quarter of a follow-on public offering of
approximately 2.6 million Common Units and the repayment of $88.9 million of
debt. The lower debt levels resulted in approximately $2.0 million lower
interest expense in fiscal 2003 compared to the prior year.
Our anticipated cash requirements for fiscal 2004 include maintenance and
growth capital expenditures of approximately $19.0 million for the repair and
replacement of property, plant and equipment, approximately $30.0 million of
interest payments on the 1996 Senior Notes, the 2002 Senior Notes and the
Revolving Credit Agreement and a principal payment of $42.5 million due on June
30, 2004 under the 1996 Senior Note Agreement. In addition, assuming
distributions remain at the current level, we will be required to pay
approximately $65.8 million in distributions to Common Unitholders and the
General Partner during fiscal 2004. Based on our current estimate of our cash
position, availability under the Revolving Credit Agreement (unused borrowing
capacity under the working capital facility of $69.5 million at September 27,
2003) and expected cash flow from operating activities, we expect to have
sufficient funds to meet our current and future obligations.
In connection with the pending acquisition of the assets and operations of
Agway Energy, we expect to close the acquisition upon completion of the auction
process, final approval of the acquisition by the Bankruptcy Court and necessary
regulatory approvals. At present, we plan to fund the $206.0 million purchase
price and related acquisition costs and expenses with capital markets
financings. In the interim, we have obtained a commitment from established
investment banking institutions to provide a $210.0 million 364-day facility to
fund all or a portion of the purchase price. If we draw on this facility, it
would bear interest at a floating rate and, at our option, may be converted at
maturity into a 9-year term loan. If the facility were drawn, we would seek to
arrange for other permanent financing to repay the facility at our earliest
opportunity, possibly through one or more offerings of equity or debt
securities. Following consummation of the acquisition, we believe that we will
have sufficient cash flow from operating activities and availability under our
Revolving Credit Agreement to fund the incremental cash requirements and to fund
incremental working capital needs of the Agway Energy business for the
forseeable future.
PENSION PLAN ASSETS
While our pension asset portfolio experienced significantly improved asset
returns in fiscal 2003, the funded status of our defined benefit pension plan
continues to be impacted by the low interest rate environment affecting the
actuarial value of the projected benefit obligations, as well as the cumulative
impact of prior losses particularly during 2002 and 2001. As a result, the
projected benefit obligation as of September 27, 2003 exceeded the market value
of pension plan assets by $42.1 million, which improved $11.1 million compared
to the $53.2 million underfunded position at the end of the prior year. The
improvement in the funded status compared to fiscal 2002 has also resulted in a
favorable adjustment of $5.0 million to accumulated other comprehensive
(loss)/income, a component of partners' capital, at the end of fiscal 2003.
Therefore, the cumulative reduction to
23
partners' capital amounted to $80.1 million on the consolidated balance sheet at
September 27, 2003 compared to the cumulative reduction of $85.1 million as of
September 28, 2002. The cumulative reduction to partners' capital is
attributable to the level of unrealized losses experienced on our pension assets
over the past three years and represent non-cash charges to our partners'
capital with no impact on the results of operations for the fiscal year ended
September 27, 2003. Our defined benefit pension plan was frozen to new
participants effective January 1, 2000 and, in furtherance of our effort to
minimize future increases in the benefit obligations, effective January 1, 2003
all future service credits were eliminated.
For purposes of computing the actuarial valuation of projected benefit
obligations, we reduced the discount rate assumption from 6.75% as of September
28, 2002 to 6.0% as of September 27, 2003 to reflect an estimate of current
market expectations related to long term interest rates. Additionally, we
reduced the expected long-term rate of return on plan assets assumption from
8.5% as of September 28, 2002 to 7.75% as of September 27, 2003 based on the
current investment mix of our pension asset portfolio and historical asset
performance. There were no minimum funding requirements for the defined benefit
pension plan during fiscal 2003, 2002 or 2001. However, in an effort to
proactively address our funded status we elected to make a voluntary
contribution of $10.0 million to our defined benefit pension plan during the
fourth quarter of fiscal 2003, thus improving our funded status. This voluntary
contribution, coupled with improved asset returns in our pension asset portfolio
during fiscal 2003, offset the negative effects on the funded status of further
declines in the interest rate environment. There can be no assurances that
future declines in capital markets, or interest rates, will not have an adverse
impact on our results of operations or cash flow.
LONG-TERM DEBT OBLIGATIONS AND OPERATING LEASE OBLIGATIONS
CONTRACTUAL OBLIGATIONS
Long-term debt obligations and future minimum rental commitments under
noncancelable operating lease agreements as of September 27, 2003 are due as
follows (amounts in thousands):
Fiscal Fiscal Fiscal Fiscal 2008 and
2004 2005 2006 2007 thereafter Total
---------------- -------------- ------------- --------------- --------------- --------------
Long-term debt $ 42,911 $ 42,940 $ 42,975 $ 42,500 $ 212,500 $ 383,826
Operating leases 17,796 12,868 9,959 5,860 6,410 52,893
Total long-term debt
obligations and ---------------- -------------- ------------- --------------- --------------- --------------
lease commitments $ 60,707 $ 55,808 $ 52,934 $ 48,360 $ 218,910 $ 436,719
================ ============== ============= =============== =============== ==============
Additionally, we have standby letters of credit in the aggregate amount of $35.4
million, in support of retention levels under our casualty insurance programs
and certain lease obligations, which expire on March 1, 2004.
OFF-BALANCE SHEET ARRANGEMENTS
OPERATING LEASES
We lease certain property, plant and equipment for various periods under
noncancelable operating leases, including all of our railroad tank cars,
approximately 70% of our vehicle fleet, approximately 30% of our customer
service centers and portions of our information systems equipment. Rental
expense under operating leases was $24.3 million, $24.0 million and $23.4
million for the years ended September 27, 2003, September 28, 2002 and September
29, 2001, respectively. Future minimum rental commitments under noncancelable
operating lease agreements as of September 27, 2003 are presented in the
immediately preceding table.
24
GUARANTEES
Financial Accounting Standards Board ("FASB") 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 fair value of equipment at the end of its lease term has historically
exceeded the guaranteed amounts, the maximum potential amount of aggregate
future payments we could be required to make under these leasing arrangements,
assuming the equipment is deemed worthless at the end of the lease term, is
approximately $14.4 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 consolidated balance sheet as
of September 27, 2003.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2002, 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. 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. The adoption of this standard did not have a
material impact 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 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 our
fourth quarter in fiscal 2003. The adoption of this standard did not have a
material impact on our consolidated financial position, results of operations or
cash flows.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation
of Variable Interest Entities" ("FIN 46"), an interpretation of Accounting
Research Bulletin No. 51, "Consolidated Financial Statements." FIN 46 addresses
consolidation by business enterprises of variable interest entities that meet
certain characteristics. The consolidation requirements of FIN 46 apply
immediately to variable interest entities created after January 31, 2003. The
consolidation requirements apply to variable interest entities created before
February 1, 2003 in the first fiscal year or interim period
25
beginning after June 15, 2003. However, in October 2003, the FASB deferred the
effective date for applying certain provisions of FIN 46 and in November 2003,
issued an exposure draft which would amend certain provisions of FIN 46. As a
result of the latest exposure draft, we are currently evaluating the impact, if
any, that FIN 46 or any future amendment may have on our financial position and
results of operations.
26
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of September 27, 2003, we were a 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 on 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 AND HEDGING ACTIVITIES
We account for derivative instruments in accordance with the provisions of
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended by SFAS No. 137, SFAS No. 138 and SFAS No. 149. 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 have been 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
(loss)/income ("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.
27
At September 27, 2003, the fair value of derivative instruments described
above resulted in derivative assets of $0.6 million included within prepaid
expenses and other current assets and derivative liabilities of $1.7 million
included within other current liabilities. For the year ended September 27, 2003
operating expenses include unrealized (non-cash) losses of $1.5 million compared
to unrealized (non-cash) gains of $5.4 million for the year ended September 28,
2002, attributable to the change in the fair value of derivative instruments not
designated as hedges. At September 27, 2003, unrealized gains on derivative
instruments designated as cash flow hedges in the amount of $1.1 million were
included in OCI and are expected to be recognized in earnings during the next 12
months as the hedged transactions occur. However, due to the volatility of the
commodities market, the corresponding value in OCI is subject to change prior to
its impact on earnings.
SENSITIVITY ANALYSIS
In an effort to estimate our exposure to unfavorable market price changes
in propane related to our open positions under derivative instruments, we
developed a model that incorporates the following data and assumptions:
A. The actual fixed contract price of open positions as of September 27,
2003 for each of the future periods.
B. The estimated future market prices for futures and forward contracts
as of September 27, 2003 as derived from the NYMEX for traded propane
futures for each of the future periods.
C. The market prices determined in B. above were adjusted adversely by a
hypothetical 10% change in the future periods and compared to the
fixed contract settlement amounts in A. above to project the potential
negative impact on earnings that would be recognized for the
respective scenario.
Based on the sensitivity analysis described above, the hypothetical 10%
adverse change in market prices for each of the future months for which a
future, forward and/or option contract exists indicate either a reduction in
potential future gains or potential losses in future earnings of $3.3 million
and $0.7 million, as of September 27, 2003 and September 28, 2002, respectively.
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.
As of September 27, 2003, our open position portfolio reflected a net long
position (purchase) aggregating $19.2 million.
The average posted price of propane on November 21, 2003 at Mont Belvieu,
Texas (a major storage point) was 55.63 cents per gallon as compared to 50.75
cents per gallon on September 27, 2003, representing a 9.6% increase.
28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our Consolidated Financial Statements and the Report of Independent
Auditors thereon and the Supplemental Financial Information listed on the
accompanying Index to Financial Statement Schedule are included herein.
SELECTED QUARTERLY FINANCIAL DATA
Due to the seasonality of the retail propane business, our first and second
quarter revenues and earnings are consistently greater than third and fourth
quarter results. The following presents our selected quarterly financial data
for the last two fiscal years (unaudited; in thousands, except per unit
amounts).
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
-------------- --------------- --------------- --------------- ---------------
Fiscal 2003
- -----------
Revenues $ 204,469 $ 295,435 $ 146,171 $ 125,604 $ 771,679
Income/(loss) before interest
expense and income taxes (a) 32,240 64,815 (3,598) (13,440) 80,017
Income/(loss) from continuing operations (a) 23,254 55,902 (12,014) (20,956) 46,186
Discontinued operations:
Gain on sale of customer service centers (b) - 2,404 79 - 2,483
Net income/(loss) (a) 23,254 58,306 (11,935) (20,956) 48,669
Income/(loss) from continuing operations per
common unit - basic 0.92 2.21 (0.47) (0.75) 1.78
Net income/(loss) per common
unit - basic (c) 0.92 2.31 (0.47) (0.75) 1.87
Net income/(loss) per common
unit - diluted (c) 0.92 2.30 (0.47) (0.75) 1.86
Cash provided by/(used in):
Operating activities 8,378 14,988 45,557 (11,623) 57,300
Investing activities (2,561) 3,235 (1,205) (4,328) (4,859)
Financing activities (14,591) (14,533) 10,655 (59,162) (77,631)
EBITDA (d) $ 39,213 $ 74,019 $ 3,198 $ (6,410) $ 110,020
Retail gallons sold 139,934 182,956 89,600 78,961 491,451
Fiscal 2002
- -----------
Revenues $ 181,864 $ 235,887 $ 137,635 $ 109,719 $ 665,105
Gain on sale of storage facility - 6,768 - - 6,768
Income/(loss) before interest
expense and income taxes (a) 29,805 71,071 (2,499) (8,825) 89,552
Net income/(loss) (a) 20,613 61,901 (11,028) (17,962) 53,524
Net income/(loss) per common
unit - basic (c) 0.82 2.46 (0.44) (0.71) 2.12
Net income/(loss) per common
unit - diluted (c) 0.82 2.45 (0.44) (0.71) 2.12
Cash provided by/(used in):
Operating activities 3,421 32,701 29,906 2,747 68,775
Investing activities (4,018) 4,034 (3,213) (3,654) (6,851)
Financing activities (14,168) (14,168) (14,186) (14,941) (57,463)
EBITDA (d) $ 37,061 $ 78,146 $ 4,549 $ (1,849) $ 117,907
Retail gallons sold 123,958 168,621 86,730 76,679 455,988
(a) These amounts include, in addition to the gain on sale of customer service
centers and the gain on sale of storage facility, gains from the disposal
of property, plant and equipment of $0.6 million for fiscal 2003 and $0.5
million for fiscal 2002.
29
(b) Gain on sale of customer service centers consists of five customer service
centers we sold during the second quarter of fiscal 2003 for total cash
proceeds of approximately $5.6 million and four customer service centers we
sold during the third quarter of fiscal 2003 for total cash proceeds of
approximately $1.6 million. We recorded a gain on sale in the second and
third quarters of approximately $2.4 million and $0.1 million,
respectively, which have been accounted for within discontinued operations
pursuant to SFAS 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.
(c) Basic net income per Common Unit is computed by dividing net income, after
deducting our general partner's interest, by the weighted average number of
outstanding Common Units. Diluted net income per Common Unit is computed by
dividing net income, after deducting our general partner's approximate 2%
interest, by the weighted average number of outstanding Common Units and
time vested restricted units granted under our 2000 Restricted Unit Plan.
(d) EBITDA represents net 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 as a component in calculating our leverage and interest coverage
ratios. EBITDA is not a recognized term under generally accepted accounting
principles ("GAAP") and should not be considered as an alternative to net
income/(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):
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
-------------- --------------- --------------- --------------- ---------------
Fiscal 2003
- -----------
Net income / (loss) $ 23,254 $ 58,306 $ (11,935) $ (20,956) $ 48,669
Add:
Provision / (benefit) for income taxes 130 37 (64) 99 202
Interest expense, net 8,856 8,876 8,480 7,417 33,629
Depreciation and amortization 6,973 6,800 6,717 7,030 27,520
---------------- --------------- ---------------- --------------- ----------------
EBITDA 39,213 74,019 3,198 (6,410) 110,020
---------------- --------------- ---------------- --------------- ----------------
Add / (subtract):
(Provision) / benefit for income taxes (130) (37) 64 (99) (202)
Interest expense, net (8,856) (8,876) (8,480) (7,417) (33,629)
Gain on disposal of property, plant and
equipment, net (346) 26 (166) (150) (636)
Gain on sale of customer service centers - (2,404) (79) - (2,483)
Changes in working capital and other
assets and liabilities (21,503) (47,740) 51,020 2,453 (15,770)
---------------- --------------- ---------------- --------------- ----------------
Net cash provided by/(used in)
Operating activities $ 8,378 $ 14,988 $ 45,557 $ (11,623) $ 57,300
================ =============== ================ =============== ================
Investing activities $ (2,561) $ 3,235 $ (1,205) $ (4,328) $ (4,859)
================ =============== ================ =============== ================
Financing activities $ (14,591) $ (14,533) $ 10,655 $ (59,162) $ (77,631)
================ =============== ================ =============== ================
30
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
-------------- --------------- --------------- --------------- ---------------
Fiscal 2002
- -----------
Net income / (loss) $ 20,613 $ 61,901 $ (11,028) $ (17,962) $ 53,524
Add:
Provision for income taxes 138 190 190 185 703
Interest expense, net 9,054 8,980 8,339 8,952 35,325
Depreciation and amortization 7,256 7,075 7,048 6,976 28,355
---------------- --------------- ---------------- --------------- ----------------
EBITDA 37,061 78,146 4,549 (1,849) 117,907
---------------- --------------- ---------------- --------------- ----------------
Add / (subtract):
Provision for income taxes (138) (190) (190) (185) (703)
Interest expense, net (9,054) (8,980) (8,339) (8,952) (35,325)
Gain on disposal of property, plant and
equipment, net (13) (263) 63 (333) (546)
Gain on sale of storage facility - (6,768) - - (6,768)
Changes in working capital and other
assets and liabilities (24,435) (29,244) 33,823 14,066 (5,790)
---------------- --------------- ---------------- --------------- ----------------
Net cash provided by/(used in)
Operating activities $ 3,421 $ 32,701 $ 29,906 $ 2,747 $ 68,775
================ =============== ================ =============== ================
Investing activities $ (4,018) $ 4,034 $ (3,213) $ (3,654) $ (6,851)
================ =============== ================ =============== ================
Financing activities $ (14,168) $ (14,168) $ (14,186) $ (14,941) $ (57,463)
================ =============== ================ =============== ================
31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Our management, including our principal executive officer and principal
financial officer, have evaluated the effectiveness of our "disclosure controls
and procedures" (as defined in Rule 13a-15(e) of the Securities Exchange Act of
1934) as of September 27, 2003. Based on such evaluation, our principal
executive officer and principal financial officer have concluded that as of
September 27, 2003, such disclosure controls and procedures are effective for
the purpose of ensuring that material information required to be in this Annual
Report is made known to them by others on a timely basis. There have not been
any changes in our internal control over financial reporting (as defined in Rule
13a-15(f) of the Securities Exchange Act of 1934) during the quarter ending
September 27, 2003 that have materially affected or are reasonably likely to
materially affect our internal control over financial reporting.
32
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
PARTNERSHIP MANAGEMENT
Our Second Amended and Restated Partnership Agreement (the "Partnership
Agreement") provides that all management powers over our business and affairs
are exclusively vested in our Board of Supervisors and, subject to the direction
of the Board of Supervisors, our officers. No Unitholder has any management
power over our business and affairs or actual or apparent authority to enter
into contracts on behalf of, or to otherwise bind, us. Three independent Elected
Supervisors and two Appointed Supervisors serve on the Board of Supervisors
pursuant to the terms of the Partnership Agreement. The Elected Supervisors are
voted on by the Unitholders to serve a term of three years. The Appointed
Supervisors are appointed by our General Partner.
The three Elected Supervisors serve on the Audit Committee with the
authority to review, at the request of the Board of Supervisors, specific
matters as to which the Board of Supervisors believes there may be a conflict of
interest in order to determine if the resolution of such conflict proposed by
the Board of Supervisors is fair and reasonable to us. Under the Partnership
Agreement, any matters approved by the Audit Committee will be conclusively
deemed to be fair and reasonable to us, approved by all of our partners and not
a breach by our General Partner or the Board of Supervisors of any duties they
may owe us or the Unitholders. The primary function of the Audit Committee is to
assist the Board of Supervisors in fulfilling its oversight responsibilities
relating to the establishment of accounting policies; preparation of financial
statements; integrity of financial reporting; compliance with applicable laws,
regulations and policies; independence and performance of the internal auditor
and independent accountants and findings of both the internal auditor and
independent accountants.
The Board of Supervisors has determined that all three members of the Audit
Committee, John Hoyt Stookey, Harold R. Logan, Jr. and Dudley C. Mecum, are
audit committee financial experts and are independent of management, as defined
in Item 7(d)(3)(iv) of Schedule 14A.
BOARD OF SUPERVISORS AND EXECUTIVE OFFICERS OF THE PARTNERSHIP
The following table sets forth certain information with respect to the
members of the Board of Supervisors and our executive officers as of November
21, 2003. Officers are elected for one-year terms and Supervisors are elected or
appointed for three-year terms.
Position With the
Name Age Partnership
- ---------------------------------------- ----- ---------------------------------------------------------
Mark A. Alexander....................... 45 President and Chief Executive Officer; Member of the
Board of Supervisors (Appointed Supervisor)
Michael J. Dunn, Jr..................... 54 Senior Vice President - Corporate Development;
Member of the Board of Supervisors (Appointed Supervisor)
David R. Eastin......................... 45 Senior Vice President and Chief Operating Officer
Robert M. Plante........................ 55 Vice President and Chief Financial Officer
Jeffrey S. Jolly........................ 51 Vice President and Chief Information Officer
Michael M. Keating...................... 50 Vice President - Human Resources and Administration
Janice G. Meola......................... 37 Vice President, General Counsel and Secretary
A. Davin D'Ambrosio..................... 39 Treasurer
Michael A. Stivala...................... 34 Controller
John Hoyt Stookey....................... 73 Member of the Board of Supervisors
(Chairman and Elected Supervisor)
Harold R. Logan, Jr..................... 59 Member of the Board of Supervisors (Elected Supervisor)
Dudley C. Mecum......................... 68 Member of the Board of Supervisors (Elected Supervisor)
Mark J. Anton........................... 77 Supervisor Emeritus
33
Mr. Alexander has served as President and Chief Executive Officer since
October 1996 and as an Appointed Supervisor since March 1996. He was Executive
Vice Chairman and Chief Executive Officer from March through October 1996. From
1989 until joining the Partnership, Mr. Alexander was an officer of Hanson
Industries (the United States management division of Hanson plc), most recently
Senior Vice President - Corporate Department. Mr. Alexander serves as Chairman
of the Board of Managers of the General Partner. He is a member of the Executive
Committee of the National Propane Gas Association.
Mr. Dunn has served as Senior Vice President since June 1998 and became
Senior Vice President - Corporate Development in November 2002. Mr. Dunn has
served as an Appointed Supervisor since July 1998. He was Vice President -
Procurement and Logistics from March 1997 until June 1998. From 1983 until
joining the Partnership, Mr. Dunn was Vice President of Commodity Trading for
the investment banking firm of Goldman Sachs & Company. Mr. Dunn serves on the
Board of Managers of the General Partner.
Mr. Eastin has served as Chief Operating Officer since May 1999 and became
a Senior Vice President in November 2000. From 1992 until joining the
Partnership, Mr. Eastin held various executive positions with Star Gas Propane
LP, most recently as Vice President - Operations. Mr. Eastin serves on the Board
of Managers of the General Partner.
Mr. Plante has served as a Vice President since October 1999 and became
Vice President and Chief Financial Officer in November 2003. He was Vice
President - Finance from March 2001 until November 2003 and Treasurer from March
1996 through October 2002. Mr. Plante held various financial and managerial
positions with predecessors of the Partnership from 1977 until 1996.
Mr. Jolly has served as Vice President and Chief Information Officer since
May 1999. He was Vice President - Information Services from July 1997 until May
1999. From May 1993 until joining the Partnership, Mr. Jolly was Vice President
- - Information Systems at The Wood Company, a food services company.
Mr. Keating has served as Vice President - Human Resources and
Administration since July 1996. He previously held senior human resource
positions at Hanson Industries and Quantum Chemical Corporation ("Quantum"), a
predecessor of the Partnership.
Mr. D'Ambrosio became Treasurer in November 2002. He served as Assistant
Treasurer from October 2000 to November 2002 and as Director of Treasury
Services from January 1998 to October 2000. Mr. D'Ambrosio joined the
Partnership in May 1996 after ten years in the commercial banking industry.
Ms. Meola has served as Vice President, General Counsel and Secretary since
November 2003. From May 1999 until November 2003, Ms. Meola served as General
Counsel and Secretary. She was Counsel from July 1998 to May 1999 and Associate
Counsel from September 1996, when she joined the Partnership, until July 1998.
Mr. Stivala has served as Controller since December 2001. From 1991 until
joining the Partnership, he held several positions with PricewaterhouseCoopers
LLP, most recently as Senior Manager in the Assurance practice. Mr. Stivala is a
Certified Public Accountant and a member of the American Institute of Certified
Public Accountants.
Mr. Stookey has served as an Elected Supervisor and Chairman of the Board
of Supervisors since March 1996. From 1986 until September 1993, he was the
Chairman, President and Chief Executive Officer of Quantum and served as
non-executive Chairman and a director of Quantum from its acquisition by Hanson
plc in September 1993 until October 1995. Mr. Stookey is a non-executive
Chairman of Per Scholas Inc.
34
Mr. Logan has served as an Elected Supervisor since March 1996. He is a
Director and Chairman of the Finance Committee of the Board of Directors of
TransMontaigne Inc., which provides logistical services (i.e. pipeline,
terminaling and marketing) to producers and end-users of refined petroleum
products. From 1995 to 2002, Mr. Logan was Executive Vice President/Finance,
Treasurer and a Director of TransMontaigne Inc. From 1987 to 1995, Mr. Logan
served as Senior Vice President of Finance and a Director of Associated Natural
Gas Corporation, an independent gatherer and marketer of natural gas, natural
gas liquids and crude oil. Mr. Logan is also a Director of The Houston
Exploration Company, Graphic Packaging, Inc. and Rivington Capital Advisors,
LLC.
Mr. Mecum has served as an Elected Supervisor since June 1996. He has been
a managing director of Capricorn Holdings, LLC (a sponsor of and investor in
leveraged buyouts) since June 1997. Mr. Mecum was a partner of G.L. Ohrstrom &
Co. (a sponsor of and investor in leveraged buyouts) from 1989 to June 1996. Mr.
Mecum is a director of Lyondell, Dyncorp, CitiGroup and Mrs. Fields Famous
Brands, Inc.
Mr. Anton has served as Supervisor Emeritus of the Board of Supervisors
since January 1999. He is a former President, Chief Executive Officer and
Chairman of the Board of Directors of Suburban Propane Gas Corporation, a
predecessor of the Partnership, and a former Executive Vice President of
Quantum.
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires our directors and executive
officers to file initial reports of ownership and reports of changes in
ownership of our Common Units with the Securities and Exchange Commission.
Directors, executive officers and ten percent Unitholders are required to
furnish the Partnership with copies of all Section 16(a) forms that they file.
Based on a review of these filings, we believe that all such filings were made
timely during fiscal 2003.
CODE OF ETHICS
We have adopted a code of ethics that applies to our senior executive team,
including our principal executive officer, principal financial officer and
principal accounting officer. Copies of our code of ethics are available without
charge from our website at www.suburbanpropane.com or upon written request
directed to: Suburban Propane Partners, L.P., Investor Relations, P.O. Box 206,
Whippany, New Jersey 07981-0206. Any amendments to, or waivers from, provisions
of this code of ethics that apply to our principal executive officer, principal
financial officer and principal accounting officer will be posted on our
website.
35
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth a summary of all compensation awarded or
paid to or earned by our chief executive officer and our four other most highly
compensated executive officers for services rendered to us during each of the
last three fiscal years.
Annual Compensation
-------------------------- LTIP All Other
Name and Principal Position Year Salary Bonus(1) Payout Compensation(2)
- --------------------------- ---- ---------- -------- ------- ---------------
Mark A. Alexander 2003 $450,000 $192,150 - $167,037
President and Chief Executive Officer 2002 450,000 157,500 25,382 158,513
2001 450,000 450,000 7,141 166,371
Michael J. Dunn, Jr. 2003 280,000 101,626 27,403 95,695
Sr. Vice President - Corporate Development 2002 275,000 81,813 12,135 85,956
2001 260,000 221,000 3,414 89,321
David R. Eastin 2003 265,000 96,182 - 91,721
Senior Vice President and 2002 260,000 77,350 2,018 81,984
Chief Operating Officer 2001 240,000 204,000 - 84,362
Robert M. Plante 2003 180,000 46,116 - 39,038
Vice President and Chief Financial Officer 2002 175,000 45,625 3,807 32,938
2001 150,000 75,000 1,071 35,169
Jeffrey S. Jolly 2003 182,500 38,964 10,366 50,443
Vice President and Chief Information Officer 2002 177,500 31,063 4,600 41,414
2001 170,000 85,000 1,294 47,660
(1) Bonuses are reported for the year earned, regardless of the year paid.
(2) For Mr. Alexander, this amount includes the following: $3,000 under the
Retirement Savings and Investment Plan; $1,200 in administrative fees under
the Cash Balance Pension Plan; $135,000 awarded under the Long-Term
Incentive Plan; and $27,837 for insurance. For Mr. Dunn, this amount
includes the following: $3,000 under the Retirement Savings and Investment
Plan; $1,200 in administrative fees under the Cash Balance Pension Plan;
$71,400 awarded under the Long-Term Incentive Plan; and $20,095 for
insurance. For Mr. Eastin, this amount includes the following: $3,000 under
the Retirement Savings and Investment Plan; $1,200 in administrative fees
under the Cash Balance Pension Plan; $67,575 awarded under the Long-Term
Incentive Plan; and $19,946 for insurance. For Mr. Plante, this amount
includes the following: $2,700 under the Retirement Savings and Investment
Plan; $1,200 in administrative fees under the Cash Balance Pension Plan;
$32,400 awarded under the Long-Term Incentive Plan; and $2,738 for
insurance. For Mr. Jolly, this amount includes the following: $2,738 under
the Retirement Savings and Investment Plan; $1,200 in administrative fees
under the Cash Balance Pension Plan; $27,375 awarded under the Long-Term
Incentive Plan; and $19,130 for insurance.
36
RETIREMENT BENEFITS
The following table sets forth the annual benefits upon retirement at age
65 in 2003, without regard to statutory maximums, for various combinations of
final average earnings and lengths of service which may be payable to Messrs.
Alexander, Dunn, Eastin, Plante and Jolly under the Pension Plan for Eligible
Employees of the Operating Partnership and its Subsidiaries and/or the Suburban
Propane Company Supplemental Executive Retirement Plan. Each such plan has been
assumed by the Partnership and each such person will be credited for service
earned under such plan to date. Messrs. Alexander, Dunn, and Eastin have 7
years, 6 years and 4 years, respectively, under both plans. For vesting
purposes, however, Mr. Alexander has 19 years combined service with the
Partnership and his prior service with Hanson Industries. Messrs. Plante and
Jolly have 26 years and 6 years, respectively, under the Pension Plan. Benefits
under the Pension Plan are limited to IRS statutory maximums for defined benefit
plans. Currently, the statutory maximum for defined benefit plan is $200,000.
Pension Plan
Annual Benefit for Years of Credited Service Shown (1,2,3,4,5,6)
Average
Earnings 5 Yrs. 10 Yrs. 15 Yrs. 20 Yrs. 25 Yrs. 30 Yrs. 35 Yrs.
- -------- ------ ------- ------- ------- ------- ------- -------
$100,000 7,888 15,775 23,663 31,551 39,438 47,326 55,214
$200,000 16,638 33,275 49,913 66,551 83,188 99,826 116,464
$300,000 25,388 50,775 76,163 101,551 126,938 152,326 177,714
$400,000 34,138 68,275 102,413 136,551 170,688 204,826 238,964
$500,000 42,888 85,775 128,663 171,551 214,438 257,326 300,214
1 The Plans' definition of earnings consists of base pay only.
2 Annual Benefits are computed on the basis of straight life annuity amounts.
The pension benefit is calculated as the sum of (a) plus (b) multiplied by
(c) where (a) is that portion of final average earnings up to 125% of
social security Covered Compensation times 1.4% and (b) is that portion of
final average earnings in excess of 125% of social security Covered
Compensation times 1.75% and (c) is credited service up to a maximum of 35
years.
3 Effective January 1, 1998, the Plan was amended to a cash balance benefit
formula for current and future Plan participants. Initial account balances
were established based upon the actuarial equivalent value of the accrued
December 31, 1997 prior plan benefit. Annual interest credits and pay-based
credits will be credited to this account. The 2002 pay-based credits for
Messrs. Alexander, Dunn, Eastin, Plante and Jolly are 3.0%, 2.0%, 1.5%,
10.0% and 2.0%, respectively. Participants as of December 31, 1997 will
receive the greater of the cash balance benefit and the prior plan benefit
through the year 2002. The Plan was amended effective January 1, 2000.
Pursuant to this amendment, individuals who are hired or rehired on or
after January 1, 2000 are not eligible to participate in the Plan.
4 In addition, a supplemental cash balance account was established equal to
the value of certain benefits related to retiree medical and vacation
benefits. An initial account value was determined for those active
employees who were eligible for retiree medical coverage as of April 1,
1998 equal to $415 multiplied by years of benefit service (maximum of 35
years). Future pay-based credits and interest are credited to this account.
The 2002 pay-based credits for Messrs. Alexander, Dunn, Eastin, Plante and
Jolly are 2.0%, 0.0%, 0.0%, 2.0% and 0.0%, respectively.
5 Effective January 1, 2003, all future pay-based credits as determined under
the cash balance benefit formula were discontinued. Interest credits
continue to be applied based on the five-year U.S. Treasury bond rate in
effect during the preceding November, plus one percent.
6 Effective January 1, 2003 the annual benefits accrued by Messrs. Alexander,
Dunn and Eastin pursuant to the Supplemental Executive Retirement Plan (in
excess of the statutory limitations governing the Pension Plan) were, in
the aggregate, approximately $100,000.
37
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
We have adopted a non-qualified, unfunded supplemental retirement plan
known as the Supplemental Executive Retirement Plan (the "SERP"). The purpose of
the SERP is to provide certain executive officers with a level of retirement
income from us, without regard to statutory maximums, including the IRS
limitation for defined benefit plans. Effective January 1, 1998, the Pension
Plan for Eligible Employees of Suburban Propane, L.P. (the "Qualified Plan") was
amended and restated as a cash balance plan. In light of the conversion of the
Qualified Plan to a cash balance formula, the SERP has been amended and restated
effective January 1, 1998. The annual Retirement Benefit under the SERP
represents the amount of Annual Benefits that the participants in the SERP would
otherwise be eligible to receive, calculated using the same pay based credits
described under the Retirement Benefits section above, applied to the amount of
Annual Compensation that exceeds the IRS statutory maximums for defined benefit
plans which is currently $200,000. Messrs. Alexander, Dunn, and Eastin currently
participate in the SERP.
Effective January 1, 2003, the SERP was discontinued with a frozen benefit
determined for Messrs. Alexander, Dunn and Eastin. Provided that the SERP
requirements are met, Mr. Alexander will receive a monthly benefit of $6,031,
Mr. Dunn will receive a monthly benefit of $347.30 and Mr. Eastin will receive a
monthly benefit of $1,053.18. In the event of a change in control involving the
Partnership, the SERP will terminate effective on the close of business 30 days
following the change in control. Each participant will be deemed retired and
will have his benefit determined as of the date the plan is terminated with
payment of the benefit no later than 90 days after the change in control. Each
participant will receive a lump sum payment equivalent to the present value of
each participant's benefit payable under this plan utilizing the lesser of the
prime rate of interest as published in the Wall Street Journal as of the date of
the change of control or one percent, which ever is less, as the discount rate
to determine the present value of accrued benefit.
LONG-TERM INCENTIVE PLAN
We have adopted a non-qualified, unfunded long-term incentive plan for
officers and key employees, effective October 1, 1997 (the "LTIP"). Payout of
the LTIP will follow the normal vesting schedule of each participant. Awards are
based on a percentage of base pay and are subject to the achievement of certain
performance criteria, including our ability to earn sufficient funds and make
cash distributions on our Common Units with respect to each fiscal year. Awards
vest over time with one-third vesting at the beginning of years three, four, and
five from the award date. We will terminate this plan effective September 30,
2004. Effective October 1, 2002 we adopted a new non-qualified, unfunded
long-term incentive plan for officers and key employees. The new plan measures
our performance as Total Return to Unitholders ("TRU") relative to a
predetermined peer group, primarily composed of other Master Limited
Partnerships, approved by our Compensation Committee. Awards are granted in
three year performance cycles based on a quartile ranking of TRU compared to the
peer group. Target awards for each participant are a percentage of base salary.
Long-Term Incentive Plan awards earned in fiscal 2003 were as follows:
Performance or
Other Period
Award Until Maturation Potential Awards Under Plan
Name FY 2003 or Payout Threshold Target Maximum
- ---- ------- --------- --------- ------ -------
Mark A. Alexander $135,000 3-5 Years $ 0 $135,000 $135,000
Michael J. Dunn, Jr. 71,400 3-5 Years 0 71,400 71,400
David R. Eastin 67,575 3-5 Years 0 67,575 67,575
Robert M. Plante 32,400 3-5 Years 0 32,400 32,400
Jeffrey S. Jolly 27,375 3-5 Years 0 27,375 27,375
38
EMPLOYMENT AGREEMENT
We entered into an employment agreement (the "Employment Agreement") with
Mr. Alexander, which became effective March 5, 1996 and was amended October 23,
1997 and April 14, 1999.
Mr. Alexander's Employment Agreement had an initial term of three years,
and automatically renews for successive one-year periods, unless earlier
terminated by us or by Mr. Alexander or otherwise terminated in accordance with
the Employment Agreement. The Employment Agreement for Mr. Alexander provides
for an annual base salary of $450,000 as of September 28, 2002 and provides for
Mr. Alexander to earn a bonus up to 100% of annual base salary (the "Maximum
Annual Bonus") for services rendered based upon certain performance criteria.
The Employment Agreement also provides for the opportunity to participate in
benefit plans made available to our other senior executives and senior managers.
We also provide Mr. Alexander with term life insurance with a face amount equal
to three times his annual base salary.
For the purposes of this section "change of control" means the occurrence
during the employment term of: (i) an acquisition of our Common Units or voting
equity interests by any person other than the Partnership, the General Partner
or any of our affiliates immediately after which such person beneficially owns
more than 25% of the combined voting power of our then outstanding units: unless
such acquisition was made by (a) us or our subsidiaries, or any employee benefit
plan maintained by us, our Operating Partnership or any of our subsidiaries, or
(b) by any person in a transaction where (A) the existing holders prior to the
transaction own at least 60% of the voting power of the entity surviving the
transaction and (B) none of the Unitholders other than the Partnership, our
subsidiaries, any employee benefit plan maintained by us, our Operating
Partnership, or the surviving entity, or the existing beneficial owner of more
than 25% of the outstanding units owns more than 25% of the combined voting
power of the surviving entity (such transaction, Non-Control Transaction): (ii)
approval by our partners of (a) merger, consolidation or reorganization
involving the Partnership other than a Non-Control Transaction: (b) a complete
liquidation or dissolution of the Partnership: or (c) the sale or other
disposition of 50% or more of our net assets to any person (other than a
transfer to a subsidiary).
If a "change of control" of the Partnership occurs and within six months
prior thereto or at any time subsequent to such change of control we terminate
the Executive's employment without "cause" or the Executive resigns with "good
reason" or the Executive terminates his employment during the six month period
commencing on the six month anniversary and ending on the twelve month
anniversary of a "change of control", then Mr. Alexander will be entitled to (i)
a lump sum severance payment equal to three times the sum of his annual base
salary in effect as of the date of termination and the Maximum Annual Bonus, and
(ii) medical benefits for three years from the date of such termination. The
Employment Agreement provides that if any payment received by Mr. Alexander is
subject to the 20% federal excise tax under Section 4999 of the Internal Revenue
Code, the payment will be grossed up to permit Mr. Alexander to retain a net
amount on an after-tax basis equal to what he would have received had the excise
tax not been payable.
Mr. Alexander also participates in the SERP, which provides retirement
income which could not be provided under our qualified plans by reason of
limitations contained in the Internal Revenue Code.
SEVERANCE PROTECTION PLAN FOR KEY EMPLOYEES
Our officers and key employees are provided with employment protection
following a "change of control" (the "Severance Protection Plan"). For the
purposes of this section "change of control" means the occurrence during the
employment term of: (i) an acquisition of our Common Units or voting equity
interests by any person other than the Partnership, our General Partner or any
of their affiliates immediately after which such person beneficially owns more
than 25% of the combined voting power of our then outstanding units: unless such
acquisition was made by (a) us or our subsidiaries, or any employee benefit plan
maintained by us, our Operating Partnership or any of our subsidiaries, or (b)
by any person in a transaction where (A) the existing holders prior to the
transaction own at least 60% of the voting power of the entity surviving the
transaction and (B) none of the
39
Unitholders other than the Partnership, our subsidiaries, any employee benefit
plan maintained by us, our Operating Partnership, or the surviving entity, or
the existing beneficial owner of more than 25% of the outstanding units owns
more than 25% of the combined voting power of the surviving entity (such
transaction a "Non-Control Transaction"): (ii) approval by our partners of (a)
merger, consolidation or reorganization involving the Partnership other than a
Non-Control Transaction: (b) a complete liquidation or dissolution of the
Partnership: or (c) the sale or other disposition of 50% or more of our net
assets to any person (other than a transfer to a subsidiary).
The Severance Protection Plan provides for severance payments equal to
sixty-five (65) weeks of base pay and target bonuses for such officers and key
employees following a "change of control" and termination of employment. This
group comprises approximately forty-three (43) individuals. Pursuant to their
severance protection agreements, Messrs. Dunn, Eastin, Plante and Jolly, as our
executive officers, have been granted severance protection payments of
seventy-eight (78) weeks of base pay and target bonuses following a "change in
control" and termination of employment in lieu of participation in the Severance
Protection Plan. Our Compensation Committee has also granted severance
protection payments of seventy-eight (78) weeks to four other executive officers
who do not participate in the Severance Protection Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
Compensation of our executive officers is determined by the Compensation
Committee of our Board of Supervisors. The Compensation Committee is comprised
of Messrs. Stookey, Mecum and Logan, none of whom are our officers or employees.
COMPENSATION OF SUPERVISORS
Mr. Stookey, who is the Chairman of the Board of Supervisors, receives
annual compensation of $75,000 for his services to us. Mr. Logan and Mr. Mecum,
the other two Elected Supervisors, receive $50,000 per year and Mr. Mark J.
Anton, who serves as Supervisor Emeritus, receives $15,000 per year. All Elected
Supervisors and the Supervisor Emeritus receive reimbursement of reasonable
out-of-pocket expenses incurred in connection with meetings of the Board of
Supervisors. We do not pay any additional remuneration to our employees (or
employees of any of our affiliates) or employees of our General Partner or any
of its affiliates for serving as members of the Board of Supervisors.
40
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of November 21, 2003
regarding the beneficial ownership of Common Units and Incentive Distribution
Rights by each member of the Board of Supervisors, each executive officer named
in the Summary Compensation table, all members of the Board of Supervisors and
executive officers as a group and each person or group known by us (based upon
filings under Section 13(d) or (g) under The Securities Exchange Act of 1934) to
own beneficially more than 5% thereof. Except as set forth in the notes to the
table, the business address of each individual or entity in the table is c/o
Suburban Propane Partners, L.P., 240 Route 10 West, Whippany, New Jersey
07981-0206 and each individual or entity has sole voting and investment power
over the Common Units reported.
SUBURBAN PROPANE, L.P.
- ----------------------
Amount and Nature of Percent
Title of Class Name of Beneficial Owner Beneficial Ownership of Class
- -------------- ------------------------ -------------------- --------
Common Units Mark A. Alexander (a) 29,000 *
Michael J. Dunn, Jr. (a) 0 -
David R. Eastin 11,000 -
Robert M. Plante 12,262 -
Jeffrey S. Jolly 3,000 -
John Hoyt Stookey 11,519 *
Harold R. Logan, Jr. 15,064 *
Dudley C. Mecum 5,634 *
Mark J. Anton (b) 4,600 *
All Members of the Board
of Supervisors and Executive
Officers as a Group (13 persons) 92,079 *
Goldman, Sachs & Co. (c) 1,709,003 6.3%
85 Broad Street Common Units
New York, NY 10004
Incentive Distribution Suburban Energy Services
Rights Group LLC N/A N/A
* Less than 1%.
(a) Excludes the following numbers of Common Units as to which the following
individuals deferred receipt as described below; Mr. Alexander - 243,902
and Mr. Dunn - 48,780. These Common Units are held in trust pursuant to a
Compensation Deferral Plan, and Mr. Alexander and Mr. Dunn will have no
voting or investment power over these Common Units until they are
distributed by the trust. Mr. Alexander and Mr. Dunn have elected to
receive the quarterly cash distributions on these deferred units.
Notwithstanding the foregoing, if a "change of control" of the Partnership
occurs (as defined in the Compensation Deferral Plan), all of the deferred
Common Units (and related distributions) held in the trust automatically
become distributable to the members.
(b) Mr. Anton shares voting and investment power over 3,600 Common Units with
his wife and over 1,000 Common Units with Lizmar Partners, L.P., a family
owned limited partnership of which he is its general partner.
(c) Holder reports having shared voting power with respect to all of the Common
Units and shared dispositive power with respect to all of the Common Units.
41
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table sets forth the aggregate fees for services related to
fiscal years 2003 and 2002 provided by PricewaterhouseCoopers LLP, our principal
accountants.
Fiscal Fiscal
2003 2002
-------------------- -------------------
Audit Fees (a) $ 599,000 $ 474,000
Audit-Related Fees (b) 206,000 12,000
Tax Fees (c) 590,000 772,600
All Other Fees (d) -- 179,900
(a) Audit Fees represent fees billed for professional services rendered for the
audit of our annual financial statements and review of our quarterly
financial statements, and audit services provided in connection with other
statutory or regulatory filings, including services related to our June
2003 public offering of Common Units.
(b) Audit-Related Fees represent fees billed for assurance services related to
the audit of our financial statements. The amount shown for fiscal 2003
consists primarily of services related to current and future compliance
with the provisions of the Sarbanes-Oxley Act of 2002. The amount shown for
fiscal 2002 consists of services related to the stand-alone audit of the
financial statements of Suburban Energy Service Group LLC, our General
Partner. In addition to these amounts, fees for services related to the
audits of the Partnership's defined benefit pension plan and defined
contribution plan financial statements, paid by the individual plans, were
$31,000 and $29,500 for the fiscal 2003 and 2002 audits, respectively.
(c) Tax Fees represent fees for professional services related to tax reporting,
compliance and transaction services assistance.
(d) All Other Fees represent fees for services provided to us not otherwise
included in the categories above. The amount shown for fiscal 2002 consists
primarily of services related to operational control reviews.
The Audit Committee of the Board of Supervisors has adopted a formal policy
concerning the approval of audit and non-audit services to be provided by the
principal accountant, PricewaterhouseCoopers LLP. The policy requires that all
services PricewaterhouseCoopers LLP may provide to us, including audit services
and permitted audit-related and non-audit services, be pre-approved by the Audit
Committee. The Audit Committee pre-approved all audit and non-audit services
provided by PricewaterhouseCoopers LLP during fiscal 2003 and reviewed all audit
and non-audit services for fiscal 2002.
42
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
1. (i) Financial Statements
See "Index to Financial Statements" set forth on page F-1.
(ii) Supplemental Financial Information
Balance Sheet Information of Suburban Energy Services Group LLC
See "Index to Supplemental Financial Information" set forth on page
F-24.
2. Financial Statement Schedule
See "Index to Financial Statement Schedule" set forth on page S-1.
3. Exhibits
See "Index to Exhibits" set forth on page E-1.
(b) Reports on Form 8-K
No reports were filed on form 8-K.
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: December 2, 2003 By: /s/ MARK A. ALEXANDER
--------------------------------
Mark A. Alexander
President, Chief Executive Officer
and Appointed Supervisor
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ MICHAEL J. DUNN, JR Senior Vice President - Corporate December 2, 2003
- --------------------------------- Development
(Michael J. Dunn, Jr.) Suburban Propane Partners, L.P.
Appointed Supervisor
/s/ JOHN HOYT STOOKEY Chairman and Elected Supervisor December 2, 2003
- ---------------------------------
(John Hoyt Stookey)
/s/ HAROLD R. LOGAN, JR. Elected Supervisor December 2, 2003
- ---------------------------------
(Harold R. Logan, Jr.)
/s/ DUDLEY C. MECUM Elected Supervisor December 2, 2003
- ---------------------------------
(Dudley C. Mecum)
/s/ ROBERT M. PLANTE Vice President and December 2, 2003
- --------------------------------- Chief Financial Officer
(Robert M. Plante) Suburban Propane Partners, L.P.
/s/ MICHAEL A. STIVALA Controller December 2, 2003
- --------------------------------- Suburban Propane Partners, L.P.
(Michael A. Stivala)
44
INDEX TO EXHIBITS
The exhibits listed on this Exhibit Index are filed as part of this Annual
Report. Exhibits required to be filed by Item 601 of Regulation S-K, which are
not listed below, are not applicable.
Exhibit
Number Description
------ -----------
D 2.1 Recapitalization Agreement dated as of November 27,
1998 by and among the Partnership, the Operating
Partnership, the General Partner, Millennium and Suburban
Energy Services Group LLC.
E 3.1 Second Amended and Restated Agreement of Limited
Partnership of the Partnership dated as of May 26, 1999.
E 3.2 Second Amended and Restated Agreement of Limited
Partnership of the Operating Partnership dated as
of May 26, 1999.
A 10.3 Note Agreement dated as of February 28, 1996 among certain
investors and the Operating Partnership relating to $425
million aggregate principal amount of 7.54% Senior Notes
due June 30, 2011.
K 10.4 Amendment No. 1 to the Note Agreement dated May 13,
1998 among certain investors and the Operating Partnership
relating to $425 million aggregate principal amount of
7.54% Senior Notes due June 30, 2011.
K 10.5 Amendment No. 2 to the Note Agreement dated March 29,
1999 among certain investors and the Operating Partnership
relating to $425 million aggregate principal amount of
7.54% Senior Notes due June 30, 2011.
K 10.6 Amendment No. 3 to the Note Agreement dated December
6, 2000 among certain investors and the Operating
Partnership relating to $425 million aggregate principal
amount of 7.54% Senior Notes due June 30, 2011.
I 10.7 Amendment No. 4 to the Note Agreement dated March 21,
2002 among certain investors and the Operating Partnership
relating to $425 million aggregate principal amount of
7.54% Senior Notes due June 30, 2011.
K 10.8 Amendment No. 5 to the Note Agreement dated November
20, 2002 among certain investors and the Operating
Partnership relating to $425 million aggregate principal
amount of 7.54% Senior Notes due June 30, 2011.
E-1
I 10.9 Guaranty Agreement dated as of April 11, 2002
provided by four direct subsidiaries of Suburban Propane,
L.P. for the 7.54% Senior Notes due June 30, 2011.
I 10.10 Intercreditor Agreement dated March 21, 2002 between
First Union National Bank, the Lenders under the Operating
Partnership's Amended and Restated Credit Agreement and
the Noteholders of the Operating Partnership's 7.54%
Senior Notes due June 30, 2011.
J 10.11 Note Agreement dated as of April 19, 2002 among certain
investors and the Operating Partnership relating to $42.5
million aggregate principal amount of 7.37% Senior Notes
due June 30, 2012.
J 10.12 Guaranty Agreement dated as of July 1, 2002 provided by
certain subsidiaries of Suburban Propane, L.P. for the
7.37% Senior Notes due June 30, 2012.
A 10.13 Employment Agreement dated as of March 5, 1996 between the
Operating Partnership and Mr. Alexander.
C 10.14 First Amendment to Employment Agreement dated as of
March 5, 1996 between the Operating Partnership and
Mr. Alexander entered into as of October 23, 1997.
F 10.15 Second Amendment to Employment Agreement dated as of
March 5, 1996 between the Operating Partnership and Mr.
Alexander entered into as of April 14, 1999.
A 10.16 The Partnership's 1996 Restricted Unit Plan.
G 10.17 Suburban Propane Partners, L.P. 2000 Restricted Unit Plan.
B 10.18 The Partnership's Severance Protection Plan dated
September 1996.
K 10.19 Suburban Propane L.P. Long-Term Incentive Plan as
amended and restated effective October 1, 1999.
F 10.20 Benefits Protection Trust dated May 26, 1999 by and
between Suburban Propane Partners, L.P.
and First Union National Bank.
F 10.21 Compensation Deferral Plan of Suburban Propane Partners,
L.P. and Suburban Propane, L.P. dated May 26, 1999.
H 10.22 First Amendment to the Compensation Deferral Plan of
Suburban Propane Partners, L.P. and Suburban Propane, L.P.
dated November 5, 2001.
H 10.23 Amended and Restated Supplemental Executive
Retirement Plan of the Partnership (effective as of
January 1, 1998).
H 10.24 Amended and Restated Retirement Savings and
Investment Plan of Suburban Propane (effective as of
January 1, 1998).
K 10.25 Amendment No. 1 to the Retirement Savings and Investment
Plan of Suburban Propane (effective January 1, 2002).
L 10.26 Second Amended and Restated Credit Agreement dated
May 8, 2003.
M 10.27 First Amendment to Second Amended and Restated Credit
Agreement dated November 4, 2003.
E-2
M 21.1 Listing of Subsidiaries of the Partnership.
M 23.1 Consent of Independent Accountants.
M 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.
M 31.2 Certification of the Vice President and Chief
Financial Officer Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
M 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.
M 32.2 Certification of the Vice President and Chief
Financial Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
- --------------------------------------------------------------------------------
A Incorporated by reference to the same numbered Exhibit to the
Partnership's Current Report on Form 8-K filed April 29, 1996.
B Incorporated by reference to the same numbered Exhibit to the
Partnership's Annual Report on Form 10-K for the fiscal year ended
September 28, 1996.
C Incorporated by reference to the same numbered Exhibit to the
Partnership's Annual Report on Form 10-K for the fiscal year ended
September 27, 1997.
D Incorporated by reference to Exhibit 2.1 to the Partnership's Current
Report on Form 8-K filed December 3, 1998.
E Incorporated by reference to the Partnership's Proxy Statement filed
pursuant to Section 14(a) of the Securities Exchange Act of 1934 on
April 22, 1999.
F Incorporated by reference to the Partnership's Quarterly Report on Form
10-Q for the fiscal quarter ended June 26, 1999.
G Incorporated by reference to Exhibit 10.16 to the Partnership's Annual
Report on Form 10-K for the fiscal year ended September 30, 2000.
H Incorporated by reference to the same numbered Exhibit to the
Partnership's Annual Report on Form 10-K for the fiscal year ended
September 29, 2001.
I Incorporated by reference to the Partnership's Quarterly Report on Form
10-Q for the fiscal quarter ended March 30, 2002.
J Incorporated by reference to the Partnership's Quarterly Report on Form
10-Q for the fiscal quarter ended June 29, 2002.
E-3
K Incorporated by reference to the same numbered Exhibit to the
Partnership's Annual Report on Form 10-K for the fiscal year ended
September 28, 2002.
L Incorporated by reference to the same numbered Exhibit to the
Partnership's Quarterly Report on Form 10-Q for the fiscal quarter
ended March 29, 2003.
M Filed herewith.
E-4
INDEX TO FINANCIAL STATEMENTS
SUBURBAN PROPANE PARTNERS, L.P. AND SUBSIDIARIES
Page
----
Report of Independent Auditors...............................................F-2
Consolidated Balance Sheets -
As of September 27, 2003 and September 28, 2002............................F-3
Consolidated Statements of Operations -
Years Ended September 27, 2003, September 28, 2002 and
September 29, 2001.........................................................F-4
Consolidated Statements of Cash Flows -
Years Ended September 27, 2003, September 28, 2002 and
September 29, 2001.........................................................F-5
Consolidated Statements of Partners' Capital -
Years Ended September 27, 2003, September 28, 2002 and
September 29, 2001.........................................................F-6
Notes to Consolidated Financial Statements...................................F-7
F-1
REPORT OF INDEPENDENT AUDITORS
To the Board of Supervisors and Unitholders of
Suburban Propane Partners, L.P.:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 15.(a)1.(i) present fairly, in all material respects, the
financial position of Suburban Propane Partners, L.P. and its subsidiaries (the
"Partnership") at September 27, 2003 and September 28, 2002 and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended September 27, 2003 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedule listed in the index appearing under Item
15.(a)2. presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements. These financial statements and financial statement schedule are the
responsibility of the Partnership's management; our responsibility is to express
an opinion on these financial statements and financial statement schedule based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Florham Park, NJ
October 23, 2003
F-2
SUBURBAN PROPANE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
September September
27, 2003 28, 2002
---------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 15,765 $ 40,955
Accounts receivable, less allowance for doubtful accounts
of $2,519 and $1,894, respectively 36,437 33,002
Inventories 41,510 36,367
Prepaid expenses and other current assets 5,200 6,465
---------------- -----------------
Total current assets 98,912 116,789
Property, plant and equipment, net 312,790 331,009
Goodwill 243,236 243,260
Other intangible assets, net 1,035 1,474
Other assets 9,657 7,614
---------------- -----------------
Total assets $ 665,630 $ 700,146
================ =================
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable $ 26,204 $ 27,412
Accrued employment and benefit costs 20,798 21,430
Current portion of long-term borrowings 42,911 88,939
Accrued insurance 7,810 8,670
Customer deposits and advances 23,958 26,125
Accrued interest 7,457 8,666
Other current liabilities 8,575 6,303
---------------- -----------------
Total current liabilities 137,713 187,545
Long-term borrowings 340,915 383,830
Postretirement benefits obligation 33,435 33,284
Accrued insurance 20,829 18,299
Accrued pension liability 42,136 53,164
Other liabilities 6,524 4,738
---------------- -----------------
Total liabilities 581,552 680,860
---------------- -----------------
Commitments and contingencies
Partners' capital:
Common Unitholders (27,256 and 24,631 units issued and outstanding at
September 27, 2003 and September 28, 2002, respectively) 165,950 103,680
General Partner 1,567 1,924
Deferred compensation (5,795) (11,567)
Common Units held in trust, at cost 5,795 11,567
Unearned compensation (2,171) (1,924)
Accumulated other comprehensive loss (81,268) (84,394)
---------------- -----------------
Total partners' capital 84,078 19,286
---------------- -----------------
Total liabilities and partners' capital $ 665,630 $ 700,146
================ =================
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
SUBURBAN PROPANE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per unit amounts)
Year Ended
-------------------------------------------------------
September September September
27, 2003 28, 2002 29, 2001
------------- ---------------- ----------------
Revenues
Propane $ 680,741 $ 570,280 $ 839,607
Other 90,938 94,825 91,929
------------- ---------------- ----------------
771,679 665,105 931,536
Costs and expenses
Cost of products sold 376,783 289,055 510,313
Operating 250,698 234,140 258,735
General and administrative 36,661 30,771 32,511
Depreciation and amortization 27,520 28,355 36,496
Gain on sale of storage facility - (6,768) -
------------- ---------------- ----------------
691,662 575,553 838,055
------------- ---------------- ----------------
Income before interest expense and provision for income taxes 80,017 89,552 93,481
Interest income (334) (600) (414)
Interest expense 33,963 35,925 40,010
------------- ---------------- ----------------
Income before provision for income taxes 46,388 54,227 53,885
Provision for income taxes 202 703 375
------------- ---------------- ----------------
Income from continuing operations 46,186 53,524 53,510
Discontinued operations (Note 14):
Gain on sale of customer service centers 2,483 - -
------------- ---------------- ----------------
Net income $ 48,669 $ 53,524 $ 53,510
============= ================ ================
General Partner's interest in net income $ 1,193 $ 1,362 $ 1,048
------------- ---------------- ----------------
Limited Partners' interest in net income $ 47,476 $ 52,162 $ 52,462
============= ================ ================
Income per Common Unit - basic
Income from continuing operations $ 1.78 $ 2.12 $ 2.14
Discontinued operations 0.09 - -
------------- ---------------- ----------------
Net income $ 1.87 $ 2.12 $ 2.14
------------- ---------------- ----------------
Weighted average number of Common Units outstanding - basic 25,359 24,631 24,514
------------- ---------------- ----------------
Income per Common Unit - diluted
Income from continuing operations $ 1.77 $ 2.12 $ 2.14
Discontinued operations 0.09 - -
------------- ---------------- ----------------
Net income $ 1.86 $ 2.12 $ 2.14
------------- ---------------- ----------------
Weighted average number of Common Units outstanding - diluted 25,495 24,665 24,530
------------- ---------------- ----------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
SUBURBAN PROPANE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended
-------------------------------------------------------
September September September
27, 2003 28, 2002 29, 2001
---------------- ----------------- -----------------
Cash flows from operating activities:
Net income $ 48,669 $ 53,524 $ 53,510
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation expense 27,097 27,857 28,517
Amortization of intangible assets 423 498 7,979
Amortization of debt origination costs 1,291 1,338 2,006
Amortization of unearned compensation 863 985 440
Gain on disposal of property, plant and
equipment, net (636) (546) (3,843)
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 (4,101) 9,635 18,601
(Increase)/decrease in inventories (5,339) 5,402 (260)
Decrease/(increase) in prepaid expenses and
other current assets 576 (2,526) 1,699
Decrease in accounts payable (1,208) (10,862) (21,109)
(Decrease)/increase in accrued employment
and benefit costs (632) (8,518) 10,969
(Decrease)/increase in accrued interest (1,209) 348 147
(Decrease)/increase in other accrued liabilities (1,825) (1,153) 4,635
(Increase)/decrease in other noncurrent assets (2,506) (439) 1,194
Decrease in other noncurrent liabilities (1,680) - (2,647)
---------------- ----------------- -----------------
Net cash provided by operating activities 57,300 68,775 101,838
---------------- ----------------- -----------------
Cash flows from investing activities:
Capital expenditures (14,050) (17,464) (23,218)
Proceeds from sale of property, plant and equipment, net 1,994 2,625 5,311
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 (4,859) (6,851) (17,907)
---------------- ----------------- -----------------
Cash flows from financing activities:
Long-term debt repayments (88,939) (408) (44,428)
Short-term debt repayments, net - - (6,500)
Credit agreement expenses (826) - (730)
Net proceeds from issuance of Common Units 72,186 - 47,079
Partnership distributions (60,052) (57,055) (54,503)
---------------- ----------------- -----------------
Net cash used in financing activities (77,631) (57,463) (59,082)
---------------- ----------------- -----------------
Net (decrease)/increase in cash and cash equivalents (25,190) 4,461 24,849
Cash and cash equivalents at beginning of year 40,955 36,494 11,645
---------------- ----------------- -----------------
Cash and cash equivalents at end of year 15,765 40,955 36,494
================ ================= =================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 33,635 $ 34,134 $ 37,774
================ ================= =================
Non-cash adjustment for minimum pension liability $ (4,938) $ 37,800 $ 47,277
================ ================= =================
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
SUBURBAN PROPANE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(in thousands)
Accumu-
lated
Other
Compre-
Number of Deferred Common Unearned hensive Total Compre-
Common Common General Compen- Units Held Compen- (Loss)/ Partners' hensive
Units Unitholders Partner sation in Trust sation Income Capital Income
----- ------------------- ------ -------- ------ ------ ------- ------
Balance at September 30, 2000 22,278 $ 58,474 $ 1,866 $ (11,567) $ 11,567 $ (640) $ 2,129 $ 61,829
Net income 52,462 1,048 53,510 $53,510
Other comprehensive income:
Unrealized holding loss (1,046) (1,046) (1,046)
Less: Reclassification
adjustment for gains
included in net income (1,083) (1,083) (1,083)
Minimum pension liability
adjustment (47,277) (47,277) (47,277)
--------
Comprehensive income $ 4,104
========
Partnership distributions (53,477) (1,026) (54,503)
Sale of Common Units under
public offering, net of
offering expenses 2,353 47,079 47,079
Grants issued under Restricted
Unit Plan, net of forfeitures 1,011 (1,011) -
Amortization of Compensation
Deferral Plan 212 212
Amortization of Restricted
Unit Plan, net of forfeitures 228 228
--------- --------- --------- -------- -------- -------- -------- ---------
Balance at September 29, 2001 24,631 105,549 1,888 (11,567) 11,567 (1,211) (47,277) 58,949
Net income 52,162 1,362 53,524 $53,524
Other comprehensive income:
Net unrealized gains on cash
flow hedges 838 838 838
Less: Reclassification of
realized gains on cash
flow hedges into earnings (155) (155) (155)
Minimum pension liability
adjustment (37,800) (37,800) (37,800)
--------
Comprehensive income $ 16,407
========
Partnership distributions (55,729) (1,326) (57,055)
Grants issued under Restricted
Unit Plan, net of forfeitures 1,698 (1,698) -
Amortization of Compensation
Deferral Plan 382 382
Amortization of Restricted
Unit Plan, net of forfeitures 603 603
--------- --------- --------- -------- -------- -------- -------- ---------
Balance at September 28, 2002 24,631 103,680 1,924 (11,567) 11,567 (1,924) (84,394) 19,286
Net income 47,476 1,193 48,669 $48,669
Other comprehensive income:
Net unrealized losses on cash
flow hedges (1,129) (1,129) (1,129)
Less: Reclassification of
realized gains on cash
flow hedges into earnings (683) (683) (683)
Minimum pension liability
adjustment 4,938 4,938 4,938
--------
Comprehensive income $ 51,795
========
Partnership distributions (58,502) (1,550) (60,052)
Sale of Common Units under
public offering, net of
offering expenses 2,625 72,186 72,186
Distribution of Common Units
held in trust 5,772 (5,772) -
Grants issued under Restricted
Unit Plan, net of forfeitures 1,110 (1,110) -
Amortization of Restricted
Unit Plan, net of forfeitures 863 863
--------- --------- --------- -------- -------- -------- -------- ---------
Balance at September 27, 2003 27,256 $ 165,950 $ 1,567 $ (5,795) $ 5,795 $ (2,171) $(81,268) $ 84,078
========= ========= ========= ======== ======== ======== ======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
SUBURBAN PROPANE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per unit amounts)
1. PARTNERSHIP ORGANIZATION AND FORMATION
Suburban Propane Partners, L.P. (the "Partnership") was formed on December 19,
1995 as a Delaware limited partnership. The Partnership and its subsidiary,
Suburban Propane, L.P. (the "Operating Partnership"), were formed to acquire and
operate the propane business and assets of Suburban Propane, a division of
Quantum Chemical Corporation (the "Predecessor Company"). In addition, Suburban
Sales & Service, Inc. (the "Service Company"), a subsidiary of the Operating
Partnership, was formed to acquire and operate the service work and appliance
and parts businesses of the Predecessor Company. The Partnership, the Operating
Partnership and the Service Company commenced operations on March 5, 1996 upon
consummation of an initial public offering of 21,562,500 common units
representing limited partner interests in the Partnership (the "Common Units"),
the private placement of $425,000 aggregate principal amount of Senior Notes due
2011 issued by the Operating Partnership and the transfer of all of the propane
assets (excluding the net accounts receivable balance) of the Predecessor
Company to the Operating Partnership and the Service Company.
On January 5, 2001, Suburban Holdings, Inc., a subsidiary of the Operating
Partnership, was formed to hold the stock of Gas Connection, Inc., Suburban @
Home, Inc. and Suburban Franchising, Inc. Gas Connection, Inc. (d/b/a HomeTown
Hearth & Grill) sells and installs natural gas and propane gas grills,
fireplaces and related accessories and supplies; Suburban @ Home, Inc. sells,
installs, services and repairs a full range of heating and air conditioning
products; and Suburban Franchising, Inc. creates and develops propane related
franchising business opportunities. The Partnership, the Operating Partnership,
the Service Company, Suburban Holdings, Inc. and its subsidiaries are
collectively referred to hereinafter as the "Partnership Entities."
From March 5, 1996 through May 26, 1999, Suburban Propane GP, Inc. (the "Former
General Partner"), a wholly-owned indirect subsidiary of Millennium Chemicals,
Inc., served as the general partner of the Partnership and the Operating
Partnership owning a 1% general partner interest in the Partnership and a
1.0101% general partner interest in the Operating Partnership. In addition, the
Former General Partner owned a 24.4% limited partner interest evidenced by
7,163,750 Subordinated Units and a special limited partner interest in the
Partnership.
On May 26, 1999, the Partnership completed a recapitalization (the
"Recapitalization") which included the redemption of the Subordinated Units and
special limited partner interest from the Former General Partner, and the
substitution of Suburban Energy Services Group LLC (the "General Partner") as
the new general partner of the Partnership and the Operating Partnership
following the General Partner's purchase of the combined 2.0101% general partner
interests for $6,000 in cash. The General Partner is owned by senior management
of the Partnership and, following the public offerings discussed in Note 13,
owns a combined 1.71% general partner interest in the Partnership and the
Operating Partnership.
The limited partner interests in the Partnership are evidenced by Common Units
traded on the New York Stock Exchange. The limited partners are entitled to
participate in distributions and exercise the rights and privileges available to
limited partners under the Second Amended and Restated Agreement of Limited
Partnership, such as the election of three of the five members of the Board of
Supervisors and vote on the removal of the general partner.
The Partnership Entities are engaged in the retail and wholesale marketing of
propane and related appliances and services. The Partnership serves
approximately 750,000 active residential, commercial, industrial and
agricultural customers from approximately 320 customer service centers in 40
states. The Partnership's operations are concentrated in the east and west coast
regions of the United States. No single customer accounted for 10% or
F-7
more of the Partnership's revenues during fiscal 2003, 2002 or 2001. During
fiscal 2003, 2002 and 2001, three suppliers provided approximately 42%, 49% and
47%, respectively, of the Partnership's total domestic propane supply. The
Partnership believes that, if supplies from any of these three suppliers were
interrupted, it would be able to secure adequate propane supplies from other
sources without a material disruption of its operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the
accounts of the Partnership Entities. All significant intercompany transactions
and account balances have been eliminated. The Partnership consolidates the
results of operations, financial condition and cash flows of the Operating
Partnership as a result of the Partnership's 98.9899% limited partner interest
in the Operating Partnership and its ability to influence control over the major
operating and financial decisions through the powers of the Board of Supervisors
provided for in the Second Amended and Restated Agreement of Limited
Partnership.
FISCAL PERIOD. The Partnership's fiscal year ends on the last Saturday nearest
to September 30.
REVENUE RECOGNITION. Sales of propane are recognized 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.
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.
CASH AND CASH EQUIVALENTS. The Partnership considers all highly liquid debt
instruments purchased with an original maturity of three months or less to be
cash equivalents. The carrying amount approximates fair value because of the
short maturity of these instruments.
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.
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 have been 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
(loss)/income 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
F-8
in current period earnings within operating expenses.
LONG-LIVED ASSETS. Long-lived assets include:
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are stated at cost.
Expenditures for maintenance and routine repairs are expensed as incurred while
betterments are capitalized as additions to the related assets and depreciated
over the asset's remaining useful life. The Partnership capitalizes costs
incurred in the acquisition and modification of computer software used
internally, including consulting fees and costs of employees dedicated solely to
a specific project. At the time assets are retired, or otherwise disposed of,
the asset and related accumulated depreciation are removed from the accounts,
and any resulting gain or loss is recognized within operating expenses.
Depreciation is determined for related groups of assets under the straight-line
method based upon their estimated useful lives as follows:
Buildings 40 Years
Building and land improvements 10-40 Years
Transportation equipment 4-30 Years
Storage facilities 20 Years
Equipment, primarily tanks and cylinders 3-40 Years
Computer software 3-7 Years
The Partnership reviews the recoverability of long-lived assets when
circumstances occur that indicate that the carrying value of an asset group may
not be recoverable. Such circumstances include a significant adverse change in
the manner in which an asset group is being used, current operating losses
combined with a history of operating losses experienced by the asset group or a
current expectation that an asset group will be sold or otherwise disposed of
before the end of its previously estimated useful life. Evaluation of possible
impairment is based on the Partnership's ability to recover the value of the
asset group from the future undiscounted cash flows expected to result from the
use and eventual disposition of the asset group. If the expected undiscounted
cash flows are less than the carrying amount of such asset, an impairment loss
is recorded as the amount by which the carrying amount of an asset group exceeds
its fair value. The fair value of an asset group will be measured using the best
information available, including prices for similar assets or the result of
using a discounted cash flow valuation technique.
GOODWILL. Goodwill represents the excess of the purchase price over the fair
value of net assets acquired. Effective September 30, 2001, the beginning of the
Partnership's 2002 fiscal year, the Partnership elected to early adopt the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"). As a result of the adoption
of SFAS 142, goodwill is no longer amortized to expense, rather is subject to an
impairment review at a reporting unit level, on an annual basis in August of
each year, or when an event occurs or circumstances change that would indicate
potential impairment. The Partnership assesses the carrying value of goodwill at
a reporting unit level based on an estimate of the fair value of the respective
reporting unit. Fair value of the reporting unit is estimated using either (i) a
market value approach taking into consideration the quoted market price of
Common Units; or (ii) discounted cash flow analyses taking into consideration
estimated cash flows in a ten-year projection period and a terminal value
calculation at the end of the projection period.
OTHER INTANGIBLE ASSETS. Other intangible assets consist primarily of
non-compete agreements which are amortized under the straight-line method over
the periods of the related agreements, ending periodically between fiscal years
2004 and 2011.
ACCRUED INSURANCE. Accrued insurance represents the estimated costs of known and
anticipated or unasserted claims under the Partnership's 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, the Partnership records 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
F-9
development factors applied to actual claims data. Claims are generally settled
within 5 years of origination.
INCOME TAXES. As discussed in Note 1, the Partnership Entities consist of two
limited partnerships, the Partnership and the Operating Partnership, and five
corporate entities. For federal and state income tax purposes, the earnings
attributable to the Partnership and the Operating Partnership are included in
the tax returns of the individual partners. As a result, no recognition of
income tax expense has been reflected in the Partnership's consolidated
financial statements relating to the earnings of the Partnership and the
Operating Partnership. The earnings attributable to the corporate entities are
subject to federal and state income taxes. Accordingly, the Partnership's
consolidated financial statements reflect income tax expense related to the
corporate entities' earnings. Net earnings for financial statement purposes may
differ significantly from taxable income reportable to Unitholders as a result
of differences between the tax basis and financial reporting basis of assets and
liabilities and the taxable income allocation requirements under the Partnership
Agreement.
Income taxes for the corporate entities are provided based on the asset and
liability approach to accounting for income taxes. Under this method, deferred
tax assets and liabilities are recognized for the expected future tax
consequences of differences between the carrying amounts and the tax basis of
assets and liabilities using enacted tax rates in effect for the year in which
the differences are expected to reverse. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period when
the change is enacted.
UNIT-BASED COMPENSATION. The Partnership accounts for unit-based compensation in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees", and related interpretations. Upon award of
restricted units under the Partnership's Restricted Unit Plan, unearned
compensation equivalent to the market price of the Restricted Units on the date
of grant is established as a reduction of partners' capital. The unearned
compensation is amortized ratably to expense over the restricted periods. The
Partnership follows the disclosure only provision of SFAS No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123"). Pro forma net income and net income
per Common Unit under the fair value method of accounting for Restricted Units
under SFAS 123 would be the same as reported net income and net income per
Common Unit.
COSTS AND EXPENSES. 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 the Partnership's
supply points to storage or to the Partnership's customer service centers. Cost
of products sold also includes the cost of appliances and related parts sold or
installed by the Partnership's 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.
All other costs of operating the Partnership's 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 the vehicle fleet, overhead and other costs of the
purchasing, training and safety departments and other direct and indirect costs
of the Partnership's customer service centers.
All costs of 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.
F-10
NET INCOME PER UNIT. Basic net income per Common Unit is computed by dividing
net income, after deducting the General Partner's approximate 2% interest, by
the weighted average number of outstanding Common Units. Diluted net income per
Common Unit is computed by dividing net income, after deducting the General
Partner's approximate 2% interest, by the weighted average number of outstanding
Common Units and time vested Restricted Units granted under the 2000 Restricted
Unit Plan. In computing diluted net income per Common Unit, weighted average
units outstanding used to compute basic net income per Common Unit were
increased by 136,000 units and 34,000 units for the years ended September 27,
2003 and September 28, 2002, respectively, to reflect the potential dilutive
effect of the time vested Restricted Units outstanding using the treasury stock
method. Net income is allocated to the Common Unitholders and the General
Partner in accordance with their respective Partnership ownership interests,
after giving effect to any priority income allocations for incentive
distributions allocated to the General Partner.
COMPREHENSIVE INCOME. The Partnership reports comprehensive (loss)/income (the
total of net income and all other non-owner changes in partners' capital) within
the consolidated statement of partners' capital. Comprehensive (loss)/income
includes unrealized gains and losses on derivative instruments accounted for as
cash flow hedges and minimum pension liability adjustments.
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 adoption
of this standard did not have a material impact on the Partnership's
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
adoption of this standard did not have a material impact on the Partnership's
consolidated financial position, results of operations or cash flows.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation
of Variable Interest Entities" ("FIN 46"), an interpretation of Accounting
Research Bulletin No. 51, "Consolidated Financial Statements." FIN 46 addresses
consolidation by business enterprises of variable interest entities that meet
certain characteristics. The consolidation requirements of FIN 46 apply
immediately to variable interest entities created after January 31, 2003. The
consolidation requirements apply to variable interest entities created before
February 1, 2003 in the first fiscal year or interim period beginning after June
15, 2003. However, in October 2003, the FASB deferred the effective date for
applying certain provisions
F-11
of FIN 46 and in November 2003, issued an exposure draft which would amend
certain provisions of FIN 46. As a result of the latest exposure draft, the
Partnership is currently evaluating the impact, if any, that FIN 46 or any
future amendment may have on its financial position and results of operations.
RECLASSIFICATIONS. Certain prior period amounts have been reclassified to
conform with the current period presentation.
3. DISTRIBUTIONS OF AVAILABLE CASH
The Partnership makes distributions to its partners approximately 45 days after
the end of each fiscal quarter of the Partnership in an aggregate amount equal
to its Available Cash for such quarter. Available Cash, as defined in the Second
Amended and Restated Partnership Agreement, generally means all cash on hand at
the end of the respective fiscal quarter less the amount of cash reserves
established by the Board of Supervisors in its reasonable discretion for future
cash requirements. These reserves are retained for the proper conduct of the
Partnership's business, the payment of debt principal and interest and for
distributions during the next four quarters. Distributions by the Partnership in
an amount equal to 100% of its Available Cash will generally be made 98.29% to
the Common Unitholders and 1.71% to the General Partner, 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 June 2003 public offering described in Note 13). 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.
The following summarizes the quarterly distributions per Common Unit declared
and paid in respect of each of the quarters in the three fiscal years in the
period ended September 27, 2003:
September 27, September 28, September 29,
2003 2002 2001
-------------------- --------------------- --------------------
First Quarter $ 0.5750 $ 0.5625 $ 0.5375
Second Quarter 0.5750 0.5625 0.5500
Third Quarter 0.5875 0.5750 0.5500
Fourth Quarter 0.5875 0.5750 0.5625
On October 23, 2003, the Partnership declared a quarterly distribution of
$0.5875 per Common Unit, or $2.35 on an annualized basis, for the fourth quarter
of fiscal 2003 that was paid on November 10, 2003 to holders of record on
November 3, 2003. This quarterly distribution includes incentive distributions
payable to the General Partner to the extent the quarterly distribution exceeds
$0.55 per Common Unit.
F-12
4. ADOPTION OF NEW ACCOUNTING STANDARD
Effective September 30, 2001, the beginning of the Partnership's 2002 fiscal
year, the Partnership elected to early adopt the provisions of SFAS 142 which
modifies the financial accounting and reporting for goodwill and other
intangible assets, including the requirement that goodwill and certain
intangible assets no longer be amortized. This new standard also requires a
transitional impairment review for goodwill, as well as an annual impairment
review, to be performed on a reporting unit basis. As a result of the adoption
of SFAS 142, amortization expense for the year ended September 28, 2002
decreased by $7,416 compared to the year ended September 29, 2001 due to the
lack of amortization expense related to goodwill. Aside from this change in
accounting for goodwill, no other change in accounting for intangible assets was
required as a result of the adoption of SFAS 142 based on the nature of the
Partnership's intangible assets. In accordance with SFAS 142, the Partnership
completed its annual impairment review and, as the fair values of identified
reporting units exceeded the respective carrying values, goodwill was not
considered impaired as of September 27, 2003 nor as of September 28, 2002.
The following table reflects the effect of the adoption of SFAS 142 on net
income and net income per Common Unit as if SFAS 142 had been in effect for the
periods presented:
September 27, September 28, September 29,
2003 2002 2001
------------- ------------- -------------
Net income:
As reported $ 48,669 $ 53,524 $ 53,510
Goodwill amortization - - 7,416
------------- ------------- -------------
As adjusted $ 48,669 $ 53,524 $ 60,926
============= ============= =============
Basic net income per Common Unit:
As reported $ 1.87 $ 2.12 $ 2.14
Goodwill amortization - - 0.29
------------- ------------- -------------
As adjusted $ 1.87 $ 2.12 $ 2.43
============= ============= =============
Diluted net income per Common Unit:
As reported $ 1.86 $ 2.12 $ 2.14
Goodwill amortization - - 0.29
------------- ------------- -------------
As adjusted $ 1.86 $ 2.12 $ 2.43
============= ============= =============
Other intangible assets at September 27, 2003 and September 28, 2002 consist
primarily of non-compete agreements with a gross carrying amount of $3,608 and
$4,240, respectively, and accumulated amortization of $2,573 and $2,766,
respectively. These non-compete agreements are amortized under the straight-line
method over the periods of the agreements, ending periodically between fiscal
years 2004 and 2011. Aggregate amortization expense related to other intangible
assets for the years ended September 27, 2003, September 28, 2002 and September
29, 2001 was $423, $498 and $563, respectively.
Aggregate amortization expense related to other intangible assets for each of
the five succeeding fiscal years as of September 27, 2003 is as follows: 2004 -
$352; 2005 - $299; 2006 - $228; 2007 - $76 and 2008 - $40.
F-13
For the year ended September 27, 2003, the net carrying amount of goodwill
decreased by $24 as a result of the sale of certain assets during the period.
5. SELECTED BALANCE SHEET INFORMATION
Inventories consist of the following:
September 27, September 28,
2003 2002
--------------------- --------------------
Propane $ 34,033 $ 28,799
Appliances 7,477 7,568
--------------------- --------------------
$ 41,510 $ 36,367
===================== ====================
The Partnership enters into contracts to buy propane for supply purposes. Such
contracts generally have one year terms subject to annual renewal, with propane
costs based on market prices at the date of delivery. Property, plant and
equipment consist of the following:
September 27, September 28,
2003 2002
--------------------- --------------------
Land and improvements $ 27,134 $ 28,043
Buildings and improvements 59,543 57,245
Transportation equipment 36,677 46,192
Storage facilities 59,554 59,069
Equipment, primarily tanks and cylinders 370,494 362,001
Computer software 12,122 3,806
Construction in progress 2,531 11,935
--------------------- --------------------
568,055 568,291
Less: accumulated depreciation 255,265 237,282
--------------------- --------------------
$ 312,790 $ 331,009
===================== ====================
Depreciation expense for the years ended September 27, 2003, September 28, 2002
and September 29, 2001 amounted to $27,097, $27,857 and $28,517, respectively.
6. LONG-TERM BORROWINGS
Long-term borrowings consist of the following:
F-14
September 27, September 28,
2003 2002
--------------------- --------------------
Senior Notes, 7.54%, due June 30, 2011 $ 340,000 $ 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 4 71
--------------------- --------------------
383,826 472,769
Less: current portion 42,911 88,939
--------------------- --------------------
$ 340,915 $ 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 which commenced June 30, 1996. The 1996 Senior Note
Agreement requires that the principal be paid in equal annual payments of
$42,500 starting July 1, 2002.
Pursuant to the Partnership's intention to refinance the first annual principal
payment of $42,500, the Operating Partnership executed on April 19, 2002 a Note
Purchase Agreement for the private placement of 10-year 7.37% Senior Notes due
June 30, 2012 (the "2002 Senior Note Agreement"). On July 1, 2002, the
Partnership received $42,500 from the issuance of the Senior Notes under the
2002 Senior Note Agreement and used the funds to pay the first annual principal
payment of $42,500 due under the 1996 Senior Note Agreement. The Operating
Partnership's obligations under the 2002 Senior Note Agreement are unsecured and
rank on an equal and ratable basis with the Operating Partnership's obligations
under the 1996 Senior Note Agreement and the Revolving Credit Agreement. 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.
The Partnership's previous 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 (the "Revolving Credit Agreement") which
extends the previous Revolving Credit Agreement until May 31, 2006. The
Revolving Credit Agreement provides a $75,000 working capital facility and an
acquisition facility of $25,000. 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, 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 September 27, 2003 there were no
borrowings outstanding under the Revolving Credit Agreement. As of September 28,
2002, $46,000 was outstanding under the acquisition facility of the previous
Revolving Credit Agreement and there were no borrowings under the working
capital facility.
As of September 27, 2003, the Partnership had borrowing capacity of $75,000
under the working capital facility and $25,000 under the acquisition facility of
the Revolving Credit Agreement. The weighted average interest rate associated
with borrowings under the Revolving Credit Agreement was 3.42%, 3.67% and 6.98%
for fiscal 2003, 2002 and 2001, respectively.
F-15
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 September 27, 2003.
Debt origination costs representing the costs incurred in connection with the
placement of, and the subsequent amendment to, the Partnership's Senior Notes
and Revolving Credit Agreement were capitalized within other assets and are
being amortized on a straight-line basis over the term of the respective debt
agreements. Other assets at September 27, 2003 and September 28, 2002 include
debt origination costs with a net carrying amount of $5,960 and $5,926,
respectively. Aggregate amortization expense related to deferred debt
origination costs included within interest expense for the years ended September
27, 2003, September 28, 2002 and September 29, 2001 was $1,291, $1,338 and
$2,006, respectively.
The aggregate amounts of long-term debt maturities subsequent to September 27,
2003 are as follows: 2004 - $42,911; 2005 - $42,940; 2006 - $42,975; 2007 -
$42,500; 2008 - $42,500; and, thereafter - $170,000.
F-16
7. RESTRICTED UNIT PLANS
In November 2000, the Partnership adopted the Suburban Propane Partners, L.P.
2000 Restricted Unit Plan (the "2000 Restricted Unit Plan") which authorizes the
issuance of Common Units with an aggregate value of $10,000 (487,804 Common
Units valued at the initial public offering price of $20.50 per unit) to
executives, managers and other employees of the Partnership. Restricted Units
issued under the 2000 Restricted Unit Plan vest over time with 25% of the Common
Units vesting at the end of each of the third and fourth anniversaries of the
issuance date and the remaining 50% of the Common Units vesting at the end of
the fifth anniversary of the issuance date. The 2000 Restricted Unit Plan
participants are not eligible to receive quarterly distributions or vote their
respective Restricted Units until vested. Restrictions also limit the sale or
transfer of the units during the restricted periods. The value of the Restricted
Unit is established by the market price of the Common Unit at the date of grant.
Restricted Units are subject to forfeiture in certain circumstances as defined
in the 2000 Restricted Unit Plan.
In 1996, the Partnership adopted the 1996 Restricted Unit Award Plan (the "1996
Restricted Unit Plan") which authorized the issuance of Common Units with an
aggregate value of $15,000 (731,707 Common Units valued at the initial public
offering price of $20.50 per unit) to executives, managers and Elected
Supervisors of the Partnership. According to the change of control provisions of
the 1996 Restricted Unit Plan, all outstanding Restricted Units on the closing
date of the Recapitalization in May 1999 vested and converted into Common Units.
At the date of the Recapitalization, individuals who became members of the
General Partner surrendered receipt of 553,896 Common Units, representing
substantially all of their vested Restricted Units, in exchange for the right to
participate in a new compensation deferral plan of the Partnership and the
Operating Partnership (see Note 8, Compensation Deferral Plan).
Following is a summary of activity in the Restricted Unit Plans:
Weighted Average
Grant Date Fair
Units Value Per Unit
------------------ -----------------------
OUTSTANDING SEPTEMBER 29, 2001 48,960 $ 20.66
Awarded 66,298 26.63
Forfeited (3,272) (20.66)
------------------ -----------------------
OUTSTANDING SEPTEMBER 28, 2002 111,986 24.19
Awarded 44,288 27.74
Forfeited (5,726) (20.66)
------------------ -----------------------
OUTSTANDING SEPTEMBER 27, 2003 150,548 $ 25.37
================== =======================
During the years ended September 27, 2003, September 28, 2002 and September 29,
2001, the Partnership amortized $863, $603 and $228, respectively, of unearned
compensation associated with the 2000 Restricted Unit Plan, net of forfeitures.
8. 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. The Deferral Plan also allows eligible
employees to defer receipt of Common Units subsequently granted by the
Partnership under the Deferral Plan. The Partnership granted Common Units under
the Deferral Plan only once during fiscal 2000. The Common Units granted under
the Deferral Plan and related Partnership distributions were subject to
forfeiture provisions such that (a) 100% of the Common Units would be forfeited
if the grantee ceased to be
F-17
employed prior to the third anniversary of the Recapitalization, (b) 75% would
be forfeited if the grantee ceased to be employed after the third anniversary
but prior to the fourth anniversary of the Recapitalization and (c) 50% would be
forfeited if the grantee ceased to be employed after the fourth anniversary but
prior to the fifth anniversary of the Recapitalization. All forfeiture
provisions lapsed in August of 2002. Upon issuance of Common Units under the
Deferral Plan, unearned compensation equivalent to the market value of the
Common Units at the date of grant is recorded. The unearned compensation is
amortized in accordance with the Deferral Plan's forfeiture provisions. The
unamortized unearned compensation value is shown as a reduction of partners'
capital in the accompanying consolidated balance sheets.
Senior management of the Partnership surrendered 553,896 Common Units, at the
date of the Recapitalization, into the Deferral Plan. The Partnership deposited
into a trust on behalf of these individuals 553,896 Common Units. During fiscal
2000, certain members of management deferred receipt of an additional 42,925
Common Units granted under the Deferral Plan, with a fair value of $19.91 per
Common Unit at the date of grant, by depositing the units into the trust.
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 September 27, 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
September 27, 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.
9. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
DEFINED BENEFIT PLAN. The Partnership has a noncontributory defined benefit
pension plan which was originally designed to cover all eligible employees of
the Partnership who met certain requirements as to age and length of service.
Effective January 1, 1998, the Partnership amended its noncontributory defined
benefit pension plan to provide for a cash balance format as compared to a final
average pay format which was in effect prior to January 1, 1998. The cash
balance format is designed to evenly spread the growth of a participant's earned
retirement benefit throughout his/her career as compared to the final average
pay format, under which a greater portion of employee benefits were earned
toward the latter stages of one's career. Effective January 1, 2000,
participation in the noncontributory defined benefit pension plan was limited to
eligible participants in existence on that date with no new participants
eligible to participate in the plan. 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
will now 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 minimum funding requirements for the defined
benefit pension plan for fiscal 2003, 2002 or 2001. Recently, there has been
increased scrutiny over cash balance defined benefit pension plans and resulting
litigation regarding such plans sponsored by other companies. These developments
may result in legislative changes impacting cash balance defined benefit pension
plans in the future. While no such legislative changes have been adopted, and if
adopted the impact on the Partnership's defined benefit pension plan is not
certain, there can be no assurances that future legislative developments will
not have an adverse effect on the Partnership's results of operations or cash
flows.
F-18
DEFINED CONTRIBUTION PLAN. The Partnership has a defined contribution plan
covering most employees. Employer contributions and costs are a percent of the
participating employees' compensation, subject to the achievement of annual
performance targets of the Partnership. These contributions totaled $1,305, $947
and $4,560 for the years ended September 27, 2003, September 28, 2002 and
September 29, 2001, respectively.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS. The Partnership provides
postretirement health care and life insurance benefits for certain retired
employees. Partnership employees hired prior to July 1993 and that retired prior
to March 1998 are eligible for such benefits if they reached a specified
retirement age while working for the Partnership. Effective January 1, 2000, the
Partnership terminated its postretirement benefit plan for all eligible
employees retiring after March 1, 1998. All active and eligible employees who
were to receive benefits under the postretirement plan subsequent to March 1,
1998, were provided a settlement by increasing their accumulated benefits under
the cash balance pension plan, noted above. The Partnership does not fund its
postretirement health care and life insurance benefit plans.
The following table provides a reconciliation of the changes in the benefit
obligations and the fair value of the plan assets for each of the years ended
September 27, 2003 and September 28, 2002 and a statement of the funded status
for both years:
Other
Pension Benefits Postretirement Benefits
--------------------------------------- -------------------------------------
2003 2002 2003 2002
------------------ ------------------ ------------------ ----------------
RECONCILIATION OF BENEFIT OBLIGATIONS:
Benefit obligation at beginning of year $ 174,698 $ 167,187 $ 41,136 $ 37,559
Service cost 629 4,445 17 16
Interest cost 11,376 11,581 2,641 2,574
Actuarial loss/(gain) 4,066 8,700 (4,115) 3,852
Curtailment gain - (1,812) - -
Benefits paid (16,593) (15,403) (2,497) (2,865)
-------------- ------------------ ------------------ ----------------
Benefit obligation at end of year $ 174,176 $ 174,698 $ 37,182 $ 41,136
============== ================== ================== ================
RECONCILIATION OF FAIR VALUE OF PLAN ASSETS:
Fair value of plan assets at beginning of year $ 121,534 $ 143,116 $ - $ -
Actual return on plan assets 17,099 (6,179) - -
Employer contributions 10,000 - 2,497 2,865
Benefits paid (16,593) (15,403) (2,497) (2,865)
-------------- ------------------ ------------------ ----------------
Fair value of plan assets at end of year $ 132,040 $ 121,534 $ - $ -
============== ================== ================== ================
FUNDED STATUS:
Funded status at end of year $ (42,136) $ (53,164) $ (37,182) $ (41,136)
Unrecognized prior service cost - - (2,306) (3,026)
Net unrecognized actuarial losses 80,139 85,077 3,603 8,060
Accumulated other comprehensive (loss) (80,139) (85,077) - -
-------------- ------------------ ------------------ ----------------
Accrued benefit liability (42,136) (53,164) (35,885) (36,102)
Less: Current portion - - 2,450 2,818
-------------- ------------------ ------------------ ----------------
Non-current benefit liability $ (42,136) $ (53,164) $ (33,435) $ (33,284)
============== ================== ================== ================
The funded status of the Partnership's defined benefit pension plan continues to
be impacted by the turbulent capital markets affecting the market value of our
pension asset portfolio and by the low interest rate environment affecting the
actuarial value of the projected benefit obligations. In an effort to minimize
future increases in the pension plan
F-19
benefit obligations, the Partnership adopted an amendment to the defined benefit
pension plan which ceased future service credits effective January 1, 2003. This
amendment resulted in a curtailment gain of $1,093 included within the net
periodic pension cost for the year ended September 28, 2002. Additionally,
during fiscal 2003, the Partnership made a voluntary contribution of $10,000 to
the plan, thereby taking proactive steps to improve the funded status of the
plan and reduce the minimum pension liability.
The following table provides the components of net periodic benefit costs for
the years ended September 27, 2003 and September 28, 2002:
Other
Pension Benefits Postretirement Benefits
------------------------------------- ---------------------------------
2003 2002 2003 2002
------------ --------------- --------------- ---------------
Service cost $ 629 $ 4,445 $ 17 $ 16
Interest cost 11,376 11,581 2,641 2,574
Expected return on plan assets (12,161) (14,974) - -
Amortization of prior service cost - (210) (720) (720)
Curtailment gain - (1,093) - -
Recognized net actuarial loss 4,066 1,912 342 41
------------ --------------- --------------- ---------------
Net periodic benefit cost $ 3,910 $ 1,661 $ 2,280 $ 1,911
============ =============== =============== ===============
Pension benefit expense was $113 (consisting of service cost of $5,024, interest
cost of $11,034, expected return on plan assets of $15,735 and amortization of
prior service cost of $210) and other postretirement benefit costs were $2,341
(consisting of service cost of $123, interest cost of $2,794, amortization of
prior service cost of $721 and recognized net actuarial loss of $145) for the
year ended September 29, 2001. The assumptions used in the measurement of the
Partnership's benefit obligations are shown in the following table:
Other
Pension Benefits Postretirement Benefits
------------------------------------- ---------------------------------
September September September September
27, 2003 28, 2002 27, 2003 28, 2002
--------------- ---------------- -------------- ------------
Weighted-average discount rate 6.00% 6.75% 6.00% 6.75%
Average rate of compensation increase n/a 3.50% - -
Weighted-average expected long-term
rate of return on plan assets 7.75% 8.50% - -
The following assumptions were used in the measurement of the Partnership's
benefit obligations as of September 29, 2001: weighted-average discount rate of
7.25%, average rate of compensation increase of 3.50% and weighted-average
expected long-term rate of return on plan assets of 9.50%. The accumulated
postretirement benefit obligation was based on a 13% increase in the cost of
covered health care benefits at September 27, 2003 and a 12% increase in the
cost of covered health care benefits at September 28, 2002. The 13% increase in
health care costs assumed at September 27, 2003 is assumed to decrease gradually
to 5.00% in fiscal 2013 and to remain at that level thereafter. Increasing the
assumed health care cost trend rates by 1.0% in each year would increase the
Partnership's benefit obligation as of September 27, 2003 by approximately
$1,354 and the aggregate of service and interest components of net periodic
postretirement benefit expense for the year ended September 27, 2003 by
approximately $105. Decreasing the assumed health care cost trend rates by 1.0%
in each year would decrease the Partnership's benefit obligation as of September
27, 2003 by approximately $1,222 and the aggregate service and interest
components of net periodic postretirement benefit expense for the year ended
September 27, 2003 by approximately $94.
F-20
10. FINANCIAL INSTRUMENTS
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. The Partnership purchases propane
at various prices that are eventually sold to its customers, exposing the
Partnership to market fluctuations in the price of propane. A control
environment has been established which includes policies and procedures for risk
assessment and the approval, reporting and monitoring of derivative instruments
and hedging activities. The Partnership closely monitors the potential impacts
of commodity price changes and, where appropriate, utilizes commodity futures,
forward and option contracts to hedge its commodity price risk, to protect
margins and to ensure supply during periods of high demand. Derivative
instruments are used to hedge a portion of the Partnership's forecasted
purchases for no more than one year in the future.
SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities," as
amended by SFAS No. 137, SFAS No. 138 and SFAS No. 149 ("SFAS 133") requires all
derivatives (with certain exceptions), whether designated in hedging
relationships or not, to be recorded on the consolidated balance sheet at fair
value. SFAS 133 requires that changes in the derivative instrument's fair value
be recognized currently in earnings unless specific hedge accounting criteria
are met. Special accounting for qualifying hedges, either fair value hedges or
cash flow hedges, allows a derivative's gains and losses to offset related
results on the hedged item in the statement of operations, and requires that a
company formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. Fair value hedges are derivative
financial instruments that hedge the exposure to changes in the fair value of an
asset or liability or an identified portion thereof attributable to a particular
risk. Cash flow hedges are derivative financial instruments that hedge the
exposure to variability in expected future cash flows attributable to a
particular risk.
Since March 31, 2002, the Partnership's futures and forward contracts qualify
and have been designated as cash flow hedges and, as such, the effective
portions of changes in the fair value of these derivative instruments are
recorded in other comprehensive (loss)/income ("OCI") and are recognized in cost
of products sold when the hedged item impacts earnings. As of September 27,
2003, unrealized gains on derivative instruments designated as cash flow hedges
in the amount of $1,129 were included in OCI and are expected to be recognized
in earnings during the next 12 months as the hedged forecasted 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.
Option contracts are not classified as hedges and, as such, changes in the fair
value of these derivative instruments are recognized within operating expenses
in the consolidated statement of operations as they occur. Additionally, prior
to March 31, 2002, the Partnership's futures and forward contracts were not
designated as cash flow hedges and the changes in fair value of these
instruments were recognized in earnings as they occurred. For the year ended
September 27, 2003, operating expenses included unrealized losses in the amount
of $1,500 compared to unrealized gain in the amount of $5,356 for the year ended
September 28, 2002, attributable to changes in the fair value of derivative
instruments not designated as hedges.
CREDIT RISK. The Partnership's principal customers are residential and
commercial end users of propane served by approximately 320 customer service
centers in 40 states. No single customer accounted for more than 10% of revenues
during fiscal 2003, 2002 or 2001 and no concentration of receivables exists at
the end of fiscal 2003 or 2002.
Futures contracts are traded on and guaranteed by the New York Merchantile
Exchange ("NYMEX") and as a result, have minimal credit risk. Futures contracts
traded with brokers of the NYMEX require daily cash settlements in margin
accounts. The Partnership is subject to credit risk with forward and option
contracts entered into with various third parties to the extent the
counterparties do not perform. The Partnership evaluates the financial condition
of each counterparty with which it conducts business and establishes credit
limits to reduce exposure to credit risk based on non-performance. The
Partnership does not require collateral to support the contracts.
F-21
FAIR VALUE OF FINANCIAL INSTRUMENTS. The fair value of cash and cash equivalents
are not materially different from their carrying amounts because of the
short-term nature of these instruments. The fair value of the Revolving Credit
Agreement approximates the carrying value since the interest rates are
periodically adjusted to reflect market conditions. Based on the current rates
offered to the Partnership for debt of the same remaining maturities, the
carrying value of the Partnership's Senior Notes approximates their fair market
value.
11. COMMITMENTS AND CONTINGENCIES
Commitments. The Partnership leases certain property, plant and equipment,
including portions of the Partnership's vehicle fleet, for various periods under
noncancelable leases. Rental expense under operating leases was $24,337, $24,005
and $23,354 for the years ended September 27, 2003, September 28, 2002 and
September 29, 2001, respectively.
Future minimum rental commitments under noncancelable operating lease agreements
as of September 27, 2003 are as follows:
Fiscal Year
-----------
2004 $ 17,796
2005 12,868
2006 9,959
2007 5,860
2008 and thereafter 6,410
CONTINGENCIES. As discussed in Note 2, 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 September
27, 2003 and September 28, 2002, the Partnership had accrued insurance
liabilities of $28,639 and $26,969, respectively, representing the total
estimated losses under these self-insurance programs. The Partnership is also
involved in various legal actions which have arisen in the normal course of
business, including those relating to commercial transactions and product
liability. Management believes, based on the advice of legal counsel, that the
ultimate resolution of these matters will not have a material adverse effect on
the Partnership's financial position or future results of operations, after
considering its self-insurance liability for known and unasserted self-insurance
claims.
The Partnership is subject to various federal, state and local environmental,
health and safety laws and regulations. Generally, these laws impose limitations
on the discharge of pollutants and establish standards for the handling of solid
and hazardous wastes. These laws include the Resource Conservation and Recovery
Act, the Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), the Clean Air Act, the Occupational Safety and Health Act, the
Emergency Planning and Community Right to Know Act, the Clean Water Act and
comparable state statutes. CERCLA, also known as the "Superfund" law, imposes
joint and several liability without regard to fault or the legality of the
original conduct on certain classes of persons that are considered to have
contributed to the release or threatened release of a "hazardous substance" into
the environment. Propane is not a hazardous substance within the meaning of
CERCLA. However, the Partnership owns real property where such hazardous
substances may exist.
Future developments, such as stricter environmental, health or safety laws and
regulations thereunder, could affect Partnership operations. The Partnership
anticipates that compliance with or liabilities under environmental, health and
safety laws and regulations, including CERCLA, will not have a material adverse
effect on the Partnership. To the extent that there are any environmental
liabilities unknown to the Partnership or environmental, health or safety laws
or regulations are made more stringent, there can be no assurance that the
Partnership's results of operations will not be materially and adversely
affected.
F-22
12. GUARANTEES
FASB 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 2010. 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 fair value of equipment at the end of its lease term has
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 $14,355. 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 consolidated balance
sheet as of September 27, 2003.
13. PUBLIC OFFERINGS
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 $9,307. The aggregate net proceeds of
$72,186 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%.
On October 17, 2000, the Partnership sold 2,175,000 Common Units in a public
offering at a price of $21.125 per Common Unit realizing proceeds of $43,500,
net of underwriting commissions and other offering expenses. On November 14,
2000, following the underwriter's partial exercise of its over-allotment option,
the Partnership sold an additional 177,700 Common Units at the same price,
generating additional net proceeds of $3,600. The aggregate net proceeds of
$47,100 were applied to reduce the Partnership's outstanding Revolving Credit
Agreement borrowings. These transactions increased the total number of Common
Units outstanding to 24,631,287.
14. DISCONTINUED OPERATIONS AND DISPOSITION
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 nine customer
service centers during fiscal 2003 for net cash proceeds of approximately
$7,197. The Partnership recorded a gain on sale of approximately $2,483 during
fiscal 2003 which has been accounted for within discontinued operations pursuant
to 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.
On January 31, 2002, the Partnership sold its 170 million gallon propane storage
facility in Hattiesburg, Mississippi, which was considered a non-strategic
asset, for net cash proceeds of approximately $7,988, resulting in a gain on
sale of approximately $6,768.
F-23
15. SUBSEQUENT EVENT
On November 10, 2003, the Partnership announced that it had entered into an
asset purchase agreement (the "Purchase Agreement") to acquire substantially all
of the assets of Agway Energy Products, LLC, Agway Energy Services PA, Inc. and
Agway Energy Services, Inc. (collectively "Agway Energy"), all of which are
wholly owned subsidiaries of Agway, Inc., for total cash consideration of
approximately $206,000, subject to certain purchase price adjustments. Agway,
Inc. is presently a debtor-in-possession under Chapter 11 of the Bankruptcy Code
pending before the United States Bankruptcy Court for the Northern District of
New York. Agway Energy is not a Chapter 11 debtor. The Purchase Agreement was
filed with the United States Bankruptcy Court and on November 24, 2003, the
Bankruptcy Court approved Agway, Inc.'s motion to establish bid procedures for
the sale. In addition, the transaction has been approved by the Partnership's
Board of Supervisors. Closing on the sale under the Purchase Agreement is
subject to the approval by the United States Bankruptcy Court following the
conclusion of an auction process, to be conducted pursuant to the jurisdiction
of the Bankruptcy Court, and is subject to regulatory approvals. The transaction
will be accounted for using the purchase method of accounting.
Under the terms of the Purchase Agreement, the Partnership would purchase all of
the operations of Agway Energy, including 139 distribution and sales centers
primarily in New York, Pennsylvania, New Jersey and Vermont. Agway Energy, based
in Syracuse, New York, markets and distributes propane, fuel oil, gasoline and
diesel fuels and installs and services a wide variety of home comfort equipment,
particularly in the area of heating, ventilation and air conditioning. For the
year ended June 30, 2003 Agway Energy provided service to more than 400,000
customers across all lines of business and sold approximately 106.3 million
gallons of propane and 356.8 million gallons of fuel oil, gasoline and diesel
fuel to retail customers for residential, commercial, industrial and
agricultural applications. While the Purchase Agreement has been reviewed and
accepted by the Bankruptcy Court, there can be no assurance that the Partnership
will ultimately be the successful bidder at the auction.
F-24
INDEX TO SUPPLEMENTAL FINANCIAL INFORMATION
SUBURBAN ENERGY SERVICES GROUP LLC
Page
----
Report of Independent Auditors............................................. F-25
Balance Sheets
As of September 27, 2003 and September 28, 2002....................... F-26
Notes to Balance Sheets.................................................... F-27
F-25
REPORT OF INDEPENDENT AUDITORS
To the Stockholders of
Suburban Energy Services Group LLC:
In our opinion, the accompanying balance sheets present fairly, in all material
respects, the financial position of Suburban Energy Services Group LLC at
September 27, 2003 and September 28, 2002 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the balance sheets are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the balance sheets, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall balance sheet
presentation. We believe that our audits provide a reasonable basis for our
opinion.
PricewaterhouseCoopers LLP
Florham Park, NJ
October 23, 2003
F-26
SUBURBAN ENERGY SERVICES GROUP LLC
BALANCE SHEETS
September September
27, 2003 28, 2002
---------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,886 $ 4,363
---------------- -----------------
Total current assets 2,886 4,363
Investment in Suburban Propane Partners, L.P. 1,566,483 1,924,003
Goodwill, net 3,112,560 3,112,560
---------------- -----------------
Total assets $ 4,681,929 $ 5,040,926
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Total liabilities - -
---------------- -----------------
Stockholders' equity
Common stock, $1 par value, 2,000 shares issued and outstanding 2,000 2,000
Additional paid in capital 1,853,333 3,405,108
Retained earnings 2,826,596 1,633,818
---------------- -----------------
Total stockholders' equity 4,681,929 5,040,926
---------------- -----------------
Total liabilities and stockholders' equity $ 4,681,929 $ 5,040,926
================ =================
The accompanying notes are an integral part of these balance sheets.
F-27
SUBURBAN ENERGY SERVICES GROUP LLC
NOTES TO BALANCE SHEETS
1. ORGANIZATION AND FORMATION
Suburban Energy Services Group LLC (the "Company") was formed on October 26,
1998 as a limited liability company pursuant to the Delaware Limited Liability
Company Act. The Company was formed to purchase the general partner interests in
Suburban Propane Partners, L.P. (the "Partnership") from Suburban Propane GP,
Inc. (the "Former General Partner"), a wholly-owned indirect subsidiary of
Millennium Chemicals Inc., and become the successor general partner. On May 26,
1999, the Company purchased a 1% general partner interest in the Partnership and
a 1.0101% general partner interest in Suburban Propane, L.P., the Operating
Partnership.
The Partnership is a publicly-traded master limited partnership whose common
units are listed on the New York Stock Exchange and is engaged in the retail and
wholesale marketing of propane and related appliances and services. As a result
of two public offerings by the Partnership on October 17, 2000 and June 18,
2003, the Company's interest in the Partnership was reduced to .701%. The
Company's interest in Suburban Propane, L.P. was not affected.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTING PERIOD. The Company's accounting period ends on the last Saturday
nearest to September 30.
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. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS. The Company considers all highly liquid debt
instruments purchased with an original maturity of three months or less to be
cash equivalents. The carrying amount approximates fair value because of the
short maturity of these instruments.
INVESTMENT IN SUBURBAN PROPANE PARTNERS, L.P. As previously noted, the Company
acquired a combined 2% general partner interest in the Partnership which was
subsequently reduced to 1.71%. The Company accounts for its investment under the
equity method of accounting whereby the Company recognizes in income its share
of net income of Suburban Propane Partners, L.P. consolidated net income (loss)
and reduces its investment balance to the extent of partnership distributions
the Company receives from Suburban Propane Partners, L.P.
GOODWILL. Goodwill represents the excess of the purchase price for the general
partner interests in the Partnership over the carrying value of the General
Partner's capital account reflected on the books of Suburban Propane Partners,
L.P. on the date of acquisition.
The Company tests goodwill for impairment on an annual basis using a two-step
impairment test. The first step compares the fair value of the Company to the
carrying value of the company. If the carrying value of the Company exceeds the
fair value of the Company, a second step is performed comparing the implied fair
value of the Company with the carrying amount of the Company's goodwill to
determine the amount of goodwill impairment, if any. Based on the Company's
annual goodwill impairment test, goodwill was not considered impaired as of
September 27, 2003.
F-28
INCOME TAXES. For Federal and state income tax purposes, the earnings and losses
attributable to the Company are included in the tax returns of the individual
stockholders. As a result, no recognition of income taxes has been reflected in
the accompanying balance sheets.
RECENTLY ISSUED ACCOUNTING STANDARDS. In January 2003, the Financial Accounting
Standards Board ("FASB") issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), an interpretation of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements." FIN 46 addresses
consolidation by business enterprises of variable interest entities that meet
certain characteristics. The consolidation requirements of FIN 46 apply
immediately to variable interest entities created after January 31, 2003. The
consolidation requirements apply to variable interest entities created before
February 1, 2003 in the first fiscal year or interim period beginning after June
15, 2003. However, in October 2003, the FASB deferred the effective date for
applying certain provisions of FIN 46 and in November 2003, issued an exposure
draft which would amend certain provisions of FIN 46. As a result of the latest
exposure draft, the Company is currently evaluating the impact, if any, that FIN
46 or any future amendment may have on its financial position.
F-29
INDEX TO FINANCIAL STATEMENT SCHEDULE
SUBURBAN PROPANE PARTNERS, L.P. AND SUBSIDIARIES
Page
----
Schedule II Valuation and Qualifying Accounts - Years Ended
September 27, 2003, September 28, 2002 and
September 29, 2001........................................... S-2
S-1
SUBURBAN PROPANE PARTNERS, L.P. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Balance at Charged Balance
Beginning to Costs and Other at End
of Period Expenses Additions Deductions of Period
------------- ------------- ------------- ------------- -------------
YEAR ENDED SEPTEMBER 29, 2001
Allowance for doubtful accounts $ 2,975 $ 5,328 $ - $ (4,311) $ 3,992
============= ============= ============= ============= =============
YEAR ENDED SEPTEMBER 28, 2002
Allowance for doubtful accounts $ 3,992 $ 1,147 $ - $ (3,245) $ 1,894
============= ============= ============= ============= =============
YEAR ENDED SEPTEMBER 27, 2003
Allowance for doubtful accounts $ 1,894 $ 3,315 $ - $ (2,690) $ 2,519
============= ============= ============= ============= =============
S-2