On March 31, 2005, the Partnership completed a refinancing (the ‘‘Refinancing’’) of all of the outstanding principal amount of the Operating Partnership’s 1996 Senior Notes and the 2002 Senior Notes (as defined below). Under the Refinancing, the Partnership issued $250,000 of additional notes under the indenture governing the 2003 Senior Notes (see below) and received proceeds of approximately $246,875, net of a $2,047 discount on sale and related underwriter fees. In addition, the Operating Partnership entered into an amendment to its Revolving Credit Agreement (see below) to provide, among other things, for a five-year $125,000 term loan facility (the ‘‘Term Loan’’). The total net proceeds of approximately $371,875 from the Refinancing, together with cash of approximately $7,335, were used to prepay $297,500 outstanding principal amount of 1996 Senior Notes and $42,500 outstanding principal amount of 2002 Senior Notes (collectively, the ‘‘Redeemed Notes’’), including a prepayment premium of approximately $31,980, interest accrued on the Redeemed Notes of approximately $6,391 from the last interest payment date through the date of redemption and related costs associated with the Refinancing.
The Redeemed Notes required an annual principal repayment of $42,500 through 2012. The Refinancing replaced the annual cash requirement for principal amortization with the $125,000 five-year Term Loan due 2010 and the $250,000 of senior notes due 2013 issued under the indenture governing the 2003 Senior Notes, significantly extending the Partnership’s debt maturities and eliminating refinancing risk associated with the amortization of the Redeemed Notes. The Refinancing is expected to reduce the Partnership’s annual interest expense for at least the next five years. The Partnership recorded a one-time charge of approximately $36,242 for the year ended September 24, 2005 as a result of the Refinancing to reflect the loss on debt extinguishment associated with the prepayment premium and the write-off of $4,262 of unamortized bond issuance costs associated with retirement of the Redeemed Notes.
On December 23, 2003, the Partnership and its subsidiary Suburban Energy Finance Corporation issued $175,000 aggregate principal amount of Senior Notes (the ‘‘2003 Senior Notes’’) with an annual interest rate of 6.875%. On March 31, 2005, in conjunction with the Refinancing, the Partnership and Suburban Energy Finance Corporation issued $250,000 additional senior notes under the indenture governing the 2003 Senior Notes through a debt offering under Rule 144A and Regulation S of the Securities Act of 1933. On September 23, 2005, pursuant to a registration rights agreement, the Partnership exchanged the $250,000 senior notes that were issued on March 31, 2005 in the Refinancing with $250,000 senior notes that were registered with the SEC. The Partnership’s obligations under the 2003 Senior Notes are unsecured and rank senior in right of payment to any future subordinated indebtedness and equally in right of payment with any future senior indebtedness. The 2003 Senior Notes are structurally subordinated to, which means they rank effectively behind, any senior debt and other liabilities of the Operating Partnership. The 2003 Senior Notes mature on December 15, 2013, and require semi-annual interest payments that began on June 15, 2004. The Partnership is permitted to redeem some or all of the 2003 Senior Notes any time on or after December 15, 2008, at redemption prices specified in the indenture governing the 2003 Senior Notes. In addition, in the event of a change of control of the Partnership, as defined in the indenture governing the 2003 Senior Notes, the Partnership must offer to repurchase the
notes at 101% of the principal amount repurchased, if the holders of the notes exercise the right of repurchase. The 2003 Senior Notes contain certain restrictions applicable to the Partnership and certain of its subsidiaries with respect to (i) the incurrence of additional indebtedness; and, (ii) liens, investments, guarantees, loans, advances, payments, mergers, consolidations, distributions, sales of assets and other transactions.
On March 5, 1996, pursuant to a senior note agreement, the Operating Partnership issued $425,000 of Senior Notes (the ‘‘1996 Senior Notes’’) with an annual interest rate of 7.54%. The 1996 Senior Notes were scheduled to mature June 30, 2011, required semi-annual interest payments and obligated the Operating Partnership to repay the principal on the 1996 Senior Notes in equal annual installments of $42,500 which started on July 1, 2002. The first annual principal payment was refinanced on July 1, 2002 and the second and third annual principal payments were made on July 1, 2003 and 2004. The remaining outstanding principal amount of the 1996 Senior Notes of $297,500 was redeemed in full on March 31, 2005. On July 1, 2002, the Operating Partnership received $42,500 from the issuance of 7.37% Senior Notes due June 30, 2012 (the ‘‘2002 Senior Notes’’) in order to refinance the first annual principal payment of $42,500 under the 1996 Senior Notes. The 2002 Senior Notes were redeemed in full on March 31, 2005.
On October 20, 2004, the Operating Partnership executed the Third Amended and Restated Credit Agreement (the ‘‘Revolving Credit Agreement’’), replacing the Second Amended and Restated Credit Agreement which would have expired in May 2006. On March 31, 2005 in conjunction with the Refinancing, the Operating Partnership executed the first amendment to the Revolving Credit Agreement to provide, among other things, for the Term Loan due March 31, 2010. The Revolving Credit Agreement, as amended, was scheduled to expire on October 20, 2008 and in addition to the Term Loan provided available credit of $150,000 in the form of a $75,000 revolving working capital facility and a separate $75,000 letter of credit facility. On August 26, 2005, the Partnership completed the second amendment to the Revolving Credit Agreement which, among other things, extended the maturity date to March 31, 2010 to coincide with the maturity of the Term Loan, eliminated the stand-alone $75,000 letter of credit facility and combined that credit with the existing revolving working capital facility and increased the available revolving borrowing capacity by an additional $25,000, thereby raising the amount of the working capital facility to $175,000 (including the $75,000 from the former stand-alone letter of credit facility). The increased borrowing capacity will provide additional financial flexibility to support the Partnership’s growth strategies, particularly in the current high commodity price environment. All other terms and conditions under the Revolving Credit Agreement remained the same.
Borrowings under the Revolving Credit Agreement, including the Term Loan, bear interest at a rate based upon either LIBOR or Wachovia National Bank's prime rate, plus, in each case, the applicable margin or the Federal Funds rate plus 1/2 of 1%. An annual facility fee ranging from 0.375% to 0.50%, based upon certain financial tests, is payable quarterly whether or not borrowings occur. As of September 24, 2005, there was $26,750 outstanding under the working capital facility of the Revolving Credit Agreement that was used to fund working capital requirements.
In connection with the Term Loan, the Operating Partnership also entered into an interest rate swap contract with a notional amount of $125,000 with the issuing lender. Effective March 31, 2005 through March 31, 2010, the Operating Partnership will pay a fixed interest rate of 4.66% to the issuing lender on notional principal amount of $125,000, effectively fixing the LIBOR portion of the interest rate at 4.66%. In return, the issuing lender will pay to the Operating Partnership a floating rate, namely LIBOR, on the same notional principal amount. The applicable margin above LIBOR, as defined in the Revolving Credit Agreement, is not included in, and will be paid in addition to this fixed interest rate of 4.66%. The fair value of the interest rate swap amounted to $1,293 at September 24, 2005 and is included in other liabilities with a corresponding amount included within OCI.
The Revolving Credit Agreement and the 2003 Senior Notes both contain various restrictive and affirmative covenants applicable to the Operating Partnership and the Partnership, respectively, including (i) restrictions on the incurrence of additional indebtedness, and (ii) restrictions on certain liens, investments, guarantees, loans, advances, payments, mergers, consolidations, distributions, sales of assets and other transactions. As a result of the Refinancing, the Partnership eliminated the requirement to maintain a leverage ratio and an interest coverage ratio associated with the Redeemed Notes without
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adding comparable financial covenants under the 2003 Senior Notes. Under the Revolving Credit Agreement, the Operating Partnership is required to maintain a leverage ratio of less than 4.0 to 1. In addition, the Operating Partnership is required to maintain an interest coverage ratio of greater than 2.5 to 1 on a consolidated basis. The Partnership and the Operating Partnership were in compliance with all covenants and terms of the 2003 Senior Notes and the Revolving Credit Agreement as of September 24, 2005.
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 24, 2005 and September 25, 2004 include debt origination costs with a net carrying amount of $8,848 and $10,506, respectively. Aggregate amortization expense related to deferred debt origination costs included within interest expense for the years ended September 24, 2005, September 25, 2004 and September 27, 2003 was $1,514, $1,421 and $1,291, respectively.
The aggregate amounts of long-term debt maturities subsequent to September 24, 2005 are as follows: 2006 – $27,225; 2007 – $0; 2008 – $0; 2009 – $0; and, thereafter-$548,070.
10. 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.
Following is a summary of activity in the 2000 Restricted Unit Plan:
| | | | | | | | | | |
| | | Units | | Weighted Average
Grant Date
Fair Value Per Unit |
| 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 | |
| Awarded | | | 115,730 | | | | 30.64 | |
| Forfeited | | | (27,560 | ) | | | (25.46 | ) |
| Issued | | | (10,605 | ) | | | (20.66 | ) |
| Outstanding September 25, 2004 | | | 228,113 | | | $ | 28.25 | |
| Awarded | | | 94,239 | | | | 33.20 | |
| Forfeited | | | (26,282 | ) | | | (30.92 | ) |
| Issued | | | (22,292 | ) | | | (24.77 | ) |
| Outstanding September 24, 2005 | | | 273,778 | | | $ | 29.17 | |
|
During the years ended September 24, 2005, September 25, 2004 and September 27, 2003, the Partnership amortized $1,806, $1,171 and $863, respectively, of unearned compensation associated with the 2000 Restricted Unit Plan, net of forfeitures.
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11. Compensation Deferral 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 the Compensation Deferral Plan.
Effective May 26, 1999, in connection with the Partnership’s Recapitalization, the Partnership adopted the Compensation Deferral Plan (the ‘‘Deferral Plan’’) which provided for eligible employees of the Partnership to defer receipt of all or a portion of the vested Restricted Units granted under the 1996 Restricted Unit Plan in exchange for the right to participate in and receive certain payments under the Deferral Plan. Senior management of the Partnership 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 are freely traded. Certain members of management elected to further defer receipt of their deferred units (totaling 299,511 Common Units) until January 2008. During fiscal 2005, an additional 3,272 Common Units with a fair value of $109 were deposited into the Deferral Plan on behalf of individuals electing to defer receipt of Common Units vested under the 2000 Restricted Unit Plan. During fiscal 2004, 5,310 Common Units were deposited into the Deferral Plan and 7,490 Common Units were distributed out of the Deferral Plan, resulting in a net reduction of $17 in the deferred compensation liability and a corresponding reduction in the value of Common Units held in trust, both within partners’ capital.
As of September 24, 2005 and September 25, 2004, there were 300,603 and 297,331 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 $5,887 and $5,778 as of September 24, 2005 and September 25, 2004, respectively, are reflected in the accompanying consolidated balance sheets as components of partners’ capital. On November 2, 2005, the Deferral Plan was amended to, among other things, disallow any additional deferrals of Common Units into the trust subsequent to December 31, 2004.
12. Employee Benefit Plans
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 $183, $1,261 and $1,305 for the years ended September 24, 2005, September 25, 2004 and September 27, 2003, respectively.
Pension Benefits and Retiree Health and Life Benefits.
Pension Benefits. 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
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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 domestic and international mutual funds, as well as fixed income securities. 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 2005, 2004 or 2003. 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.
Retiree Health and Life Benefits. 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’s postretirement health care and life insurance benefit plans are unfunded.
Projected Benefit Obligation, Fair Value of Plan Assets and Funded Status. The following tables provide a reconciliation of the changes in the benefit obligations and the fair value of the plan assets for each of the years ended September 24, 2005 and September 25, 2004 and a statement of the funded status for both years using an end of year measurement date:
| | | | | | | | | | | | | | | | | | |
| | | Pension Benefits | | Retiree Health and Life
Benefits |
| | | 2005 | | 2004 | | 2005 | | 2004 |
| Reconciliation of benefit obligations: | | | | | | | | | | | | | | | | |
| Benefit obligation at beginning of year | | $ | 177,056 | | | $ | 174,176 | | | $ | 35,506 | | | $ | 37,182 | |
| Service cost | | | — | | | | — | | | | 18 | | | | 18 | |
| Interest cost | | | 9,107 | | | | 9,765 | | | | 1,783 | | | | 2,138 | |
| Actuarial loss/(gain) | | | 12,025 | | | | 13,415 | | | | (1,377 | ) | | | (956 | ) |
| Settlement payments | | | (8,251 | ) | | | (12,288 | ) | | | — | | | | — | |
| Benefits paid | | | (7,858 | ) | | | (8,012 | ) | | | (2,257 | ) | | | (2,876 | ) |
| Benefit obligation at end of year | | $ | 182,079 | | | $ | 177,056 | | | $ | 33,673 | | | $ | 35,506 | |
| Reconciliation of fair value of plan assets: | | | | | | | | | | | | | | | | |
| Fair value of plan assets at beginning of year | | $ | 142,021 | | | $ | 132,040 | | | $ | — | | | $ | — | |
| Actual return on plan assets | | | 15,961 | | | | 15,181 | | | | — | | | | — | |
| Employer contributions | | | — | | | | 15,100 | | | | 2,257 | | | | 2,876 | |
| Settlement payments | | | (8,251 | ) | | | (12,288 | ) | | | — | | | | — | |
| Benefits paid | | | (7,858 | ) | | | (8,012 | ) | | | (2,257 | ) | | | (2,876 | ) |
| Fair value of plan assets at end of year | | $ | 141,873 | | | $ | 142,021 | | | $ | — | | | $ | — | |
|
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| | | | | | | | | | | | | | | | | | |
| | | Pension Benefits | | Retiree Health and Life
Benefits |
| | | 2005 | | 2004 | | 2005 | | 2004 |
| Reconciliation of benefit obligations: | | | | | | | | | | | | | | | | |
| Funded status: | | | | | | | | | | | | | | | | |
| Funded status at end of year | | $ | (40,206 | ) | | $ | (35,035 | ) | | $ | (33,673 | ) | | $ | (35,506 | ) |
| Unrecognized prior service cost | | | — | | | | — | | | | (865 | ) | | | (1,585 | ) |
| Net unrecognized actuarial losses | | | 75,656 | | | | 76,898 | | | | 1,269 | | | | 2,646 | |
| Net amount recognized at end of year | | $ | 35,450 | | | $ | 41,863 | | | $ | (33,269 | ) | | $ | (34,445 | ) |
| Amounts recognized in consolidated balance sheets consist of: | | | | | | | | | | | | | | | | |
| Prepaid benefit cost | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Accrued benefit liability | | | (40,206 | ) | | | (35,035 | ) | | | (33,269 | ) | | | (34,445 | ) |
| Accumulated other comprehensive (loss) | | | 75,656 | | | | 76,898 | | | | — | | | | — | |
| Net amount recognized at end of year | | $ | 35,450 | | | $ | 41,863 | | | | (33,269 | ) | | | (34,445 | ) |
| Less: Current portion | | | | | | | | | | | 2,211 | | | | 2,829 | |
| Non-current benefit liability | | | | | | | | | | $ | (31,058 | ) | | $ | (31,616 | ) |
|
The change in accumulated other comprehensive (loss) attributable to a favorable movement in the minimum pension liability for the year ended September 24, 2005 was $1,242. During fiscal 2004, lump sum benefit payments to either terminated or retired individuals amounted to $12,288. The lump sum benefit payments exceeded the interest cost component of the net periodic pension cost of $9,765 and, as a result, the Partnership was required to recognize a non-cash settlement charge of $5,337 during the fourth quarter of fiscal 2004, pursuant to SFAS 88 ‘‘Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits.’’ The non-cash charge was required to accelerate recognition of a portion of cumulative unrecognized losses in the defined benefit pension plan. These unrecognized losses were previously accumulated as a reduction to partners’ capital (cumulative reduction of $80,139 as of the end of the 2003 fiscal year) and were being amortized to expense as part of the Partnership’s net periodic pension cost in accordance with SFAS 87 ‘‘Employers’ Accounting for Pensions.’’
The Partnership made voluntary contributions of $15,100 and $10,000 to the defined benefit pension plan during fiscal 2004 and 2003, respectively, thereby taking proactive steps to improve the funded status of the plan and reduce the minimum pension liability.
Plan Asset Allocation. The following table presents the allocation of assets held in trust:
| | | | | | | | | | |
| | | September 24, 2005
Actual Allocation | | September 25, 2004
Actual Allocation |
| Common stock | | | 42 | % | | | 42 | % |
| Corporate bonds | | | 0 | % | | | 8 | % |
| Government bonds | | | 0 | % | | | 12 | % |
| Mutual funds | | | 55 | % | | | 30 | % |
| Cash and cash equiva lents | | | 3 | % | | | 8 | % |
| | | | 100 | % | | | 100 | % |
|
The Partnership’s investment policies and strategies, as set forth in the Investment Management Policy and Guidelines, are monitored by a Benefits Committee comprised of seven members of management. The investment objective related to the defined benefit pension plan assets is to maximize total return with strong emphasis on the preservation of capital. The target asset mix is as follows: (i) the domestic equity portfolio should range between 40% and 60%; (ii) the international equity portfolio should range between 5% and 25%; and, (iii) the fixed income portion of the portfolio should range between 20% and 50%.
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Projected Contributions and Benefit Payments. There are no projected minimum funding requirements under the Partnership’s defined benefit pension plan for fiscal 2006. The Partnership estimates that retiree health and life benefit contributions will be $2,959 for fiscal 2006. Estimated future benefit payments for both pension and retiree health and life benefits are as follows:
| | | | | | | | | | |
| Fiscal Year | | Pension
Benefits | | Retiree Health
and Life Benefits |
| 2006 | | $ | 17,940 | | | $ | 2,959 | |
| 2007 | | | 14,695 | | | | 2,921 | |
| 2008 | | | 14,725 | | | | 2,868 | |
| 2009 | | | 14,974 | | | | 2,810 | |
| 2010 | | | 14,838 | | | | 2,734 | |
| 2011 through 2015 | | | 68,985 | | | | 12,950 | |
|
Effect on Operations. The following table provides the components of net periodic pension costs included in operating expenses for the years ended September 24, 2005, September 25, 2004 and September 27, 2003:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension Benefits | | Retiree Health and Life Benefits |
| | | 2005 | | 2004 | | 2003 | | 2005 | | 2004 | | 2003 |
| Service cost | | $ | — | | | $ | — | | | $ | 629 | | | $ | 18 | | | $ | 18 | | | $ | 17 | |
| Interest cost | | | 9,107 | | | | 9,765 | | | | 11,376 | | | | 1,783 | | | | 2,138 | | | | 2,641 | |
| Expected return on plan assets | | | (9,335 | ) | | | (9,848 | ) | | | (12,161 | ) | | | — | | | | — | | | | — | |
| Amortization of prior service cost | | | — | | | | — | | | | — | | | | (720 | ) | | | (720 | ) | | | (720 | ) |
| Settlement charge | | | — | | | | 5,337 | | | | — | | | | — | | | | — | | | | — | |
| Recognized net actuarial loss | | | 6,641 | | | | 5,986 | | | | 4,066 | | | | — | | | | — | | | | 342 | |
| Net periodic benefit costs | | $ | 6,413 | | | $ | 11,240 | | | $ | 3,910 | | | $ | 1,081 | | | $ | 1,436 | | | $ | 2,280 | |
|
Actuarial Assumptions. The assumptions used in the measurement of the Partnership’s benefit obligations as of September 24, 2005 and September 25, 2004 are shown in the following table:
| | | | | | | | | | | | | | | | | | |
| | | Pension Benefits | | Retiree Health and Life
Benefits |
| | | 2005 | | 2004 | | 2005 | | 2004 |
| Weighted-average discount rate | | | 5.25 | % | | | 5.50 | % | | | 5.25 | % | | | 5.25 | % |
| Average rate of compensation increase | | | n/a | | | | n/a | | | | n/a | | | | n/a | |
|
The assumptions used in the measurement of periodic pension and postretirement benefit costs for the years ended September 24, 2005, September 25, 2004 and September 27, 2003 are shown in the following table:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension Benefits | | Retiree Health and Life Benefits |
| | | 2005 | | 2004 | | 2003 | | 2005 | | 2004 | | 2003 |
| Weighted-average discount rate | | | 5.50 | % | | | 6.00 | % | | | 6.75 | % | | | 5.25 | % | | | 6.00 | % | | | 6.75 | % |
| Average rate of compensation increase | | | n/a | | | | n/a | | | | n/a | | | | n/a | | | | n/a | | | | n/a | |
| Weighted-average expected long-term rate of return on plan assets | | | 7.50 | % | | | 7.75 | % | | | 8.50 | % | | | n/a | | | | n/a | | | | n/a | |
| Health care cost trend | | | n/a | | | | n/a | | | | n/a | | | | 11.00 | % | | | 11.50 | % | | | 13.00 | % |
|
The discount rate assumption takes into consideration current market expectations related to long-term interest rates and the projected duration of the Partnership’s pension obligations based on a benchmark index with similar characteristics as the expected cash flow requirements of the Partnership’s defined benefit pension plan over the long-term. The long-term rate of return on plan assets assumption reflects estimated future performance in the Partnership’s pension asset portfolio considering the investment mix of the pension asset portfolio and historical asset performance.
The 11.00% increase in health care costs assumed at September 24, 2005 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 24, 2005
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by approximately $967 and the aggregate of service and interest components of net periodic postretirement benefit expense for the year ended September 24, 2005 by approximately $60. Decreasing the assumed health care cost trend rates by 1.0% in each year would decrease the Partnership’s benefit obligation as of September 24, 2005 by approximately $855 and the aggregate of service and interest components of net periodic postretirement benefit expense for the year ended September 24, 2005 by approximately $54. The Partnership has concluded that the prescription drug benefits within the retiree medical plan will not qualify for a Medicare subsidy available under recent legislation.
13. Financial Instruments
Derivative Instruments and Hedging Activities. The Partnership purchases propane and refined fuels at various prices that are eventually sold to its customers, exposing the Partnership to market fluctuations in the price of these commodities. 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. There were no unrealized gains or losses associated with the Partnership’s commodity price hedging activities included in OCI as of September 24, 2005.
For the years ended September 24, 2005, September 25, 2004 and September 27, 2003, operating expenses included unrealized losses in the amount of $2,497, $4,523 and $1,500, respectively, attributable to changes in the fair value of derivative instruments not designated as hedges. In connection with the Agway Acquisition, the Partnership acquired certain futures and option contracts that were identified as hedges of future purchases of fuel oil and propane with a fair value of $6,327 which were recorded as derivative assets at fair value in purchase accounting. As the underlying futures and option contracts were settled during fiscal 2004, the derivative assets were charged to cost of products sold as an offset to the realized gains from contract settlement. The impact on cost of products sold represented a non-cash charge resulting from the application of purchase accounting on derivative instruments acquired. For the year ended September 25, 2004, the Partnership recorded a non-cash charge of $6,327 within cost of products sold related to contracts settled during the period.
In addition, borrowings under the Term Loan bear interest at a variable rate based upon either LIBOR or Wachovia National Bank's prime rate, plus an applicable margin depending on the level of the Operating Partnership’s total leverage. Therefore, the Partnership is subject to interest rate risk on the variable component of the interest rate. On March 31, 2005, the Partnership entered into an interest rate swap agreement in order to manage its interest rate risk. The interest rate swap is being accounted for under SFAS 133 and has been designated as a cash flow hedge. Changes in the fair value of the interest rate swap are recognized in OCI until the hedged item is recognized in earnings. As of September 24, 2005, an unrealized loss of $1,293 was included in OCI attributable to the interest rate swap agreement and is expected to be recognized in earnings as the interest on the Term Loan impacts earnings through March 31, 2010. However, due to changes in the interest rate environment, the corresponding value in OCI is subject to change prior to its impact on earnings.
Credit Risk. The Partnership’s principal customers are residential and commercial end users of propane and refined fuels served by approximately 370 customer service centers in 30 states. No single customer accounted for more than 10% of revenues during fiscal 2005, 2004 or 2003 and no concentration of receivables exists at the end of fiscal 2005 or 2004.
Futures contracts are traded on and guaranteed by the New York Mercantile 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.
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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.
14. 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 $28,559, $27,315 and $24,337 for the years ended September 24, 2005, September 25, 2004 and September 27, 2003, respectively.
Future minimum rental commitments under noncancelable operating lease agreements as of September 24, 2005 are as follows:
Fiscal Year
| | | | | | |
| 2006 | | $20,295 |
| 2007 | | 15,096 |
| 2008 | | 10,688 |
| 2009 | | 5,856 |
| 2010 and thereafter | | 5,814 |
|
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 24, 2005 and September 25, 2004, the Partnership had accrued insurance liabilities of $46,457 and $38,241, 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. For the portion of the estimated self-insurance liability that exceeds insurance deductibles, the Partnership records an asset within other assets related to the amount of the liability expected to be covered by insurance which amounted to $10,046 and $2,941 as of September 24, 2005 and September 25, 2004, respectively.
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.
The Partnership is also subject to various laws and governmental regulations concerning environmental matters and expects that it will be required to expend funds to participate in the remediation of certain sites, including sites where it has been designated by the Environmental Protection Agency (‘‘EPA’’) as a potentially responsible party (‘‘PRP’’) under CERCLA and at sites with above ground and underground fuel storage tanks.
With the Agway Acquisition, the Partnership acquired certain properties and assets, including fuel oil tanks and gasoline stations, that are subject to extensive federal, state and local environmental laws and
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regulation, including investigation and remediation of contaminated soil and groundwater, transportation of hazardous materials, other environmental protection measures and health and safety matters. Based on a review of certain Phase I Environmental Site Assessments and, at certain sites, groundwater and/or soil sample analysis, the Partnership identified that certain of these properties had either known or probable environmental exposure, some of which are currently in varying stages of investigation, remediation or monitoring. Under the agreement for the Agway Acquisition, the seller was required to deposit $15,000 from the total purchase price into an escrow account to be used to fund remediation costs at the acquired properties. The escrowed funds will be used to fund environmental costs and expenses during the first three years following the closing date of the Agway Acquisition. Subject to amounts withheld with respect to any pending claims made prior to the third anniversary of the closing date of the Agway Acquisition, any remaining escrowed funds will be remitted to the seller at the end of the three-year period.
Based on the Partnership’s best estimate of future costs for environmental investigations, remediation and ongoing monitoring activities associated with acquired properties with either known or probable environmental exposures an environmental reserve in the amount of $13,750 was established in purchase accounting. The Partnership established a corresponding environmental escrow asset in the amount of $13,750 related to the future reimbursement from escrowed funds for environmental spending. As of September 24, 2005 and September 25, 2004, the environmental reserve amounted to $5,768 and $11,500, respectively, and the corresponding environmental escrow asset amounted to $6,151 and $11,500, respectively. The environmental reserves are recorded on an undiscounted basis.
Estimating the extent of the Partnership’s responsibility for a particular site and the method and ultimate cost of remediation of that site requires a number of assumptions and estimates on the part of management. As a result, the ultimate outcome of remediation of the sites may differ from current estimates. As additional information becomes available, estimates will be adjusted as necessary. Based on information currently available, and taking into consideration the level of the environmental reserve and the environmental escrow discussed above, management believes that any liability that may ultimately result from changes in current estimates will not have a material impact on the results of operations, financial position or cash flows of the Partnership.
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.
15. Guarantees
The Partnership has residual value guarantees associated with certain of its operating leases, related primarily to transportation equipment, with remaining lease periods scheduled to expire periodically through fiscal 2012. 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 $18,121. Of this amount, the fair value of residual value guarantees for operating leases entered into after December 31, 2002 was $6,292 and $3,684 as of September 24, 2005 and September 25, 2004, respectively, which is reflected in other liabilities, with a corresponding amount included within other assets, in the accompanying consolidated balance sheets.
16. Public Offerings
On December 16, 2003, the Partnership sold 2,600,000 Common Units in a public offering at a price of $30.90 per Common Unit realizing proceeds of $76,026, net of underwriting commissions and other offering expenses. On December 23, 2003, following the underwriters’ full exercise of their over-allotment option, the Partnership sold an additional 390,000 Common Units at $30.90 per Common Unit, generating
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additional net proceeds of $11,540. The aggregate net proceeds of $87,566 were used to fund a portion of the purchase price for the Agway Acquisition. These transactions increased the total number of Common Units outstanding to 30,256,767. As a result of the Public Offering, the combined General Partner interest in the Partnership was reduced from 1.71% to 1.54% while the Common Unitholder interest in the Partnership increased from 98.29% to 98.46%.
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%.
17. Discontinued Operations and Disposition
The Partnership continuously evaluates its existing operations to identify opportunities to optimize the return on assets employed and selectively divests operations in slower growing or non-strategic markets and seeks to reinvest in markets that are considered to present more opportunities for growth. In line with that strategy, during fiscal 2004, the Partnership sold 24 customer service centers for net cash proceeds of $39,352. The Partnership recorded a gain on sale of $26,332 during fiscal 2004 which was accounted for within discontinued operations in accordance with SFAS No. 144, ‘‘Accounting for the Impairment or Disposal of Long-Lived Assets’’ (‘‘SFAS 144’’). During fiscal 2005, the Partnership finalized certain purchase price adjustments with the buyer of these customer service centers and recorded an additional gain on sale of $976. The individual captions on the consolidated statements of operations for the years ended September 25, 2004 and September 27, 2003 exclude the results from these discontinued operations, which were part of the Partnership’s propane segment.
During fiscal 2003, the Partnership sold nine customer service centers, which were part of the Partnership’s propane segment, for net cash proceeds of approximately $7,197. The Partnership recorded a gain on sale of $2,483 during fiscal 2003 which was accounted for within discontinued operations pursuant to SFAS 144.
18. Segment Information
The Partnership manages and evaluates its operations in five reportable segments: Propane, Fuel Oil and Refined Fuels, Natural Gas and Electricity, HVAC and All Other. The chief operating decision maker evaluates performance of the operating segments using a number of performance measures, including gross margins and operating profit. Costs excluded from these profit measures are captured in Corporate and include corporate overhead expenses not allocated to the operating segments. Unallocated corporate overhead expenses include all costs of back office support functions that are reported as general and administrative expenses in the consolidated statements of operations. In addition, certain costs associated with field operations support that are reported in operating expenses in the consolidated statements of operations, including purchasing, training and safety, are not allocated to the individual operating segments. Thus, operating profit for each operating segment includes only the costs that are directly attributable to the operations of the individual segment. The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies in Note 2.
The propane segment is primarily engaged in the retail distribution of propane to residential, commercial, industrial and agricultural customers and, to a lesser extent, wholesale distribution to large industrial end users. In the residential and commercial markets, propane is used primarily for space heating, water heating, cooking and clothes drying. 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
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furnaces and as a cutting gas. In the agricultural markets, propane is primarily used for tobacco curing, crop drying, poultry brooding and weed control.
The fuel oil and refined fuels segment is primarily engaged in the retail distribution of fuel oil, diesel, kerosene and gasoline to residential and commercial customers for use primarily as a source of heat in homes and buildings.
The natural gas and electricity segment is engaged in the marketing of natural gas and electricity to residential and commercial customers in the deregulated energy markets of New York and Pennsylvania. Under this operating segment, the Partnership owns the relationship with the end consumer and has agreements with the local distribution companies to deliver the natural gas or electricity from the Partnership’s suppliers to the customer.
The HVAC segment is engaged in the sale, installation and servicing of a wide variety of home comfort equipment and parts, particularly in the areas of heating, ventilation and air conditioning.
The All other business segment is comprised of the activities from our HomeTown Hearth & Grill and Suburban Franchising subsidiaries.
The following table presents certain data by reportable segment and provides a reconciliation of total operating segment information to the corresponding consolidated amounts for the periods presented:
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| | | | | | | | | | | | | | |
| | | Year Ended |
| | | September 24,
2005 | | September 25,
2004 | | September 27,
2003 |
| Revenues: | | | | | | | | | | | | |
| Propane | | $ | 969,943 | | | $ | 856,109 | | | $ | 680,840 | |
| Fuel oil and refined fuels | | | 431,223 | | | | 281,682 | | | | — | |
| Natural gas and electricity | | | 102,803 | | | | 68,452 | | | | — | |
| HVAC | | | 106,115 | | | | 92,072 | | | | 46,938 | |
| All other | | | 10,150 | | | | 8,939 | | | | 7,297 | |
| Total revenues | | $ | 1,620,234 | | | $ | 1,307,254 | | | $ | 735,075 | |
| Income (loss) before interest expense, loss on debt extinguishment and provision for income taxes: | | | | | | | | | | | | |
| Propane | | $ | 147,468 | | | $ | 143,933 | | | $ | 133,278 | |
| Fuel oil and refined fuels | | | (6,474 | ) | | | 14,911 | | | | — | |
| Natural gas and electricity | | | 6,463 | | | | 4,154 | | | | — | |
| HVAC | | | (12,423 | ) | | | (2,686 | ) | | | (4,281 | ) |
| All other | | | (3,802 | ) | | | (8,125 | ) | | | (3,460 | ) |
| Corporate | | | (62,865 | ) | | | (82,408 | ) | | | (45,687 | ) |
| Total income before interest expense, loss on debt extinguishment and provision for income taxes | | | 68,367 | | | | 69,779 | | | | 79,850 | |
| Reconciliation to income from continuing operations | | | | | | | | | | | | |
| Interest expense, net | | | 40,374 | | | | 40,832 | | | | 33,629 | |
| Loss on debt extinguishment | | | 36,242 | | | | — | | | | — | |
| Provision for income taxes | | | 803 | | | | 3 | | | | 202 | |
| (Loss) income from continuing operations | | $ | (9,052 | ) | | $ | 28,944 | | | $ | 46,019 | |
| Depreciation and amortization: | | | | | | | | | | | | |
| Propane | | $ | 25,393 | | | $ | 26,347 | | | $ | 22,908 | |
| Fuel oil and refined fuels | | | 4,802 | | | | 4,302 | | | | — | |
| Natural gas and electricity | | | 967 | | | | 555 | | | | — | |
| HVAC | | | 1,509 | | | | 640 | | | | 80 | |
| All other | | | 281 | | | | 343 | | | | 383 | |
| Corporate | | | 4,810 | | | | 4,556 | | | | 4,149 | |
| Total depreciation and amortization | | $ | 37,762 | | | $ | 36,743 | | | $ | 27,520 | |
|
| | | | | | | | | | |
| | | As of |
| | | September 24,
2005 | | September 25,
2004 |
| Assets | | | | | | | | |
| Propane | | $ | 735,094 | | | $ | 720,645 | |
| Fuel oil and refined fuels | | | 124,232 | | | | 121,386 | |
| Natural gas and electricity | | | 30,294 | | | | 26,630 | |
| HVAC | | | 15,590 | | | | 20,715 | |
| All other | | | 4,990 | | | | 4,941 | |
| Corporate | | | 143,378 | | | | 185,671 | |
| Eliminations | | | (87,981 | ) | | | (87,981 | ) |
| Total assets | | $ | 965,597 | | | $ | 992,007 | |
|
Income (loss) before interest expense, loss on debt extinguishment and provision for income taxes for the HVAC segment for the year ended September 24, 2005 included the non-cash charge of $656 for goodwill impairment (see Note 6). In addition, depreciation and amortization expense for the HVAC segment for the year ended September 24, 2005 reflects the non-cash charge of $810 for the impairment of other
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intangible assets (see Note 6). Income (loss) before interest expense, loss on debt extinguishment and income taxes for the All other segment for the year ended September 25, 2004 included the $3,177 non-cash charge for goodwill impairment.
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INDEX TO FINANCIAL STATEMENT SCHEDULE
SUBURBAN PROPANE PARTNERS, L.P. AND SUBSIDIARIES
| | | | | | | | | | |
| | | | | Page |
| Schedule II | | Valuation and Qualifying Accounts – Years Ended September 24, 2005, September 25, 2004 and September 27, 2003 | | | S-2 | |
|
S-1
SCHEDULE II
SUBURBAN PROPANE PARTNERS, L.P. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
| | | | | | | | | | | | | | | | | | | | | | |
| | | Balance at
Beginning of
Period | | Charged to
Costs
and Expenses | | Other
Additions | | Deductions | | Balance
at End
of Period |
| Year Ended September 27, 2003 | | | | | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 1,894 | | | $ | 3,315 | | | $ | — | | | $ | (2,690 | ) | | $ | 2,519 | |
| Year Ended September 25, 2004 (a) | | | | | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 2,519 | | | $ | 9,128 | | | $ | 2,966 | | | $ | (6,717 | ) | | $ | 7,896 | |
| Year Ended September 24, 2005 | | | | | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 7,896 | | | $ | 9,289 | | | $ | — | | | $ | (7,220 | ) | | $ | 9,965 | |
|
| |
| (a) | Other additions for the year ended September 25, 2004 reflects allowances for doubtful accounts associated with the acquisition of Agway Energy. Additionally, the increase in charges and deductions during fiscal 2004 was primarily attributable to the impact of increased sales and related accounts receivable from the Agway Energy operations. |
S-2
