UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
-------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the transition period from ______ to ______
Commission File Number: 1-14222
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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
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(973) 887-5300
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for each shorter period that the Registrant
was required to file such reports), and (2) had been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
As of August 13, 2001: 24,631,287 Common Units were outstanding.
This Report contains a total of 22 pages.
SUBURBAN PROPANE PARTNERS, L.P. AND SUBSIDIARIES
Index to Form 10-Q
PART I FINANCIAL INFORMATION
Item 1 - Financial Statements (unaudited) Page
----
Condensed Consolidated Balance Sheets as of
June 30, 2001 and September 30, 2000 3
Condensed Consolidated Statements of Operations
for the three months ended June 30, 2001 and
June 24, 2000 4
Condensed Consolidated Statements of Operations
for the nine months ended June 30, 2001 and
June 24, 2000 5
Condensed Consolidated Statements of Cash Flows
for the three and nine months ended June 30, 2001
and June 24, 2000 6
Condensed Consolidated Statement of Partners' Capital
for the nine months ended June 30, 2001 7
Notes to Condensed Consolidated Financial Statements 8
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 3 - Quantitative and Qualitative Disclosures about
Market Risk 19
PART II OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 21
SIGNATURES 22
2
SUBURBAN PROPANE PARTNERS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
June 30, September 30,
2001 2000
--------- -------------
ASSETS
Current assets:
Cash and cash equivalents ................................ $ 38,387 $ 11,645
Accounts receivable, less allowance for doubtful accounts
of $5,355 and $2,975, respectively .................... 57,045 61,303
Inventories .............................................. 41,865 41,631
Prepaid expenses and other current assets ................ 5,468 7,581
--------- ---------
Total current assets ............................. 142,765 122,160
Property, plant and equipment, net ........................... 344,834 350,640
Net prepaid pension cost ..................................... 33,603 33,687
Goodwill and other intangibles assets, net ................... 254,705 261,617
Other assets ................................................. 1,850 3,012
--------- ---------
Total assets .................................... $ 777,757 $ 771,116
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable ......................................... $ 39,977 $ 59,794
Accrued employment and benefit costs ..................... 26,387 18,979
Short-term borrowings .................................... -- 6,500
Current portion of long-term borrowings .................. 42,500 --
Accrued insurance ........................................ 7,620 6,170
Customer deposits and advances ........................... 7,251 23,164
Accrued interest ......................................... 16,424 8,171
Other current liabilities ................................ 7,339 8,683
--------- ---------
Total current liabilities ...................... 147,498 131,461
Long-term borrowings ......................................... 430,293 517,219
Postretirement benefits obligation ........................... 33,937 33,885
Accrued insurance ............................................ 18,500 19,458
Other liabilities ............................................ 5,778 7,264
--------- ---------
Total liabilities ............................. 636,006 709,287
--------- ---------
Partners' capital:
Common Unitholders ..................................... 140,508 58,474
General Partner ........................................ 2,560 1,866
Deferred compensation trust ............................ (11,567) (11,567)
Common Units held in trust, at cost .................... 11,567 11,567
Unearned Compensation .................................. (1,317) (640)
Accumulated other comprehensive income ................. -- 2,129
--------- ---------
Total partners' capital ...................... 141,751 61,829
--------- ---------
Total liabilities and partners' capital ...... $ 777,757 $ 771,116
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
SUBURBAN PROPANE PARTNERS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per Unit amounts)
(unaudited)
Three Months Ended
--------------------------------
June 30, 2001 June 24, 2000
------------- -------------
Revenues
Propane ................................................... $ 124,370 $ 136,802
Other ..................................................... 18,934 17,157
--------- ---------
143,304 153,959
Costs and Expenses
Cost of sales ............................................. 70,849 84,965
Operating ................................................. 63,401 52,919
General and administrative ................................ 5,119 6,595
Depreciation and amortization ............................. 9,477 9,865
--------- ---------
148,846 154,344
--------- ---------
(Loss) before interest expense and provision for income taxes (5,542) (385)
Interest expense, net ....................................... 8,912 10,243
--------- ---------
(Loss) before provision for income taxes .................... (14,454) (10,628)
Provision for income taxes .................................. 105 71
--------- ---------
Net (loss) .................................................. $ (14,559) $ (10,699)
========= =========
General Partner's interest in net (loss) .................... $ (275) $ (214)
--------- ---------
Limited Partner's interest in net (loss) .................... $ (14,284) $ (10,485)
========= =========
Basic and diluted net (loss) per Unit ....................... $ (0.58) $ (0.47)
========= =========
Weighted average number of Units outstanding ................ 24,631 22,279
--------- ---------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
SUBURBAN PROPANE PARTNERS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per Unit amounts)
(unaudited)
Nine Months Ended
-------------------------------
June 30, 2001 June 24, 2000
------------- -------------
Revenues
Propane ................................................... $ 725,556 $ 581,970
Other ..................................................... 64,439 63,331
--------- ---------
789,995 645,301
Costs and Expenses
Cost of sales ............................................. 441,136 352,439
Operating ................................................. 192,447 167,580
General and administrative ................................ 22,561 20,210
Depreciation and amortization ............................. 29,082 28,755
Gain on sale of assets .................................... -- (10,328)
--------- ---------
685,226 558,656
--------- ---------
Income before interest expense and provision for income taxes 104,769 86,645
Interest expense, net ....................................... 29,165 29,885
--------- ---------
Income before provision for income taxes .................... 75,604 56,760
Provision for income taxes .................................. 270 163
--------- ---------
Net income .................................................. $ 75,334 $ 56,597
========= =========
General Partner's interest in net income .................... $ 1,460 $ 1,132
--------- ---------
Limited Partner's interest in net income .................... $ 73,874 $ 55,465
========= =========
Basic and diluted net income per Unit ....................... $ 3.02 $ 2.49
========= =========
Weighted average number of Units outstanding ................ 24,475 22,274
--------- ---------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
SUBURBAN PROPANE PARTNERS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended Nine Months Ended
-------------------- --------------------
June 30, June 24, June 30, June 24,
2001 2000 2001 2000
-------- -------- -------- --------
Cash flows from operating activities:
Net (loss)/income ................................................... $(14,559) $(10,699) $ 75,334 $ 56,597
Adjustments to reconcile net (loss)/income to net cash
provided by operations:
Depreciation ................................................... 7,152 7,402 21,411 21,914
Amortization ................................................... 2,325 2,463 7,671 6,841
(Gain) on disposal of property, plant and
equipment .................................................... (2,405) (654) (3,297) (11,246)
Changes in operating assets and liabilities, net of
acquisitions and dispositions:
Decrease/(increase) in accounts receivable ..................... 53,939 34,735 4,258 (10,315)
(Increase)/decrease in inventories ............................. (2,269) 5,330 (234) (4,299)
Decrease/(increase) in prepaid expenses and
other current assets .......................................... 379 (9) (266) (2,292)
(Decrease) in accounts payable ................................. (5,835) (14,240) (19,817) (2,892)
Increase/(decrease) in accrued employment
and benefit costs ............................................. 1,980 206 7,742 (2,110)
Increase in accrued interest ................................... 7,928 7,709 8,253 7,670
(Decrease) in other accrued liabilities ........................ (1,643) (588) (15,807) (11,131)
Other noncurrent assets ............................................. 1,560 (101) 1,217 (638)
Deferred credits and other noncurrent liabilities ................... (1,901) 820 (2,421) (502)
-------- -------- -------- --------
Net cash provided by operating activities ................. 46,651 32,374 84,044 47,597
-------- -------- -------- --------
Cash flows from investing activities:
Capital expenditures ............................................... (6,585) (4,950) (16,087) (14,322)
Acquisitions ....................................................... -- (328) -- (98,012)
Proceeds from sale of property, plant and equipment, net ........... 2,592 1,216 4,029 19,900
-------- -------- -------- --------
Net cash (used in) investing activities ................... (3,993) (4,062) (12,058) (92,434)
-------- -------- -------- --------
Cash flows from financing activities:
Long-term (repayments)/borrowings, net ............................. (378) (7,307) (44,397) 89,672
Short-term (repayments), net ....................................... (7,250) (10,000) (6,500) (2,750)
Credit agreement expenses .......................................... -- -- (730) (3,123)
Net proceeds from public offering .................................. -- -- 47,079 --
Partnership distribution ........................................... (13,807) (11,935) (40,696) (35,498)
-------- -------- -------- --------
Net cash (used in)/provided by financing activities........ (21,435) (29,242) (45,244) 48,301
-------- -------- -------- --------
Net increase/(decrease) in cash .......................................... 21,223 (930) 26,742 3,464
Cash and cash equivalents at beginning of period ......................... 17,164 12,786 11,645 8,392
-------- -------- -------- --------
Cash and cash equivalents at end of period ............................... 38,387 11,856 38,387 11,856
======== ======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest ............................................... $ 1,088 $ 2,572 $ 21,010 $ 22,272
======== ======== ======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
SUBURBAN PROPANE PARTNERS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(in thousands)
(unaudited)
Accumulated
Deferred Common Other
Number of Units Common General Compensation Units in Unearned Comprehensive
Common Unitholders Partner Trust Trust Compensation Income
--------------- ----------- ------- ------------ -------- ------------ -------------
Balance at September 30, 2000 ..... 22,279 $ 58,474 $ 1,866 $ (11,567) $ 11,567 $ (640) $ 2,129
Net income ......................... 73,874 1,460
Other comprehensive income:
Unrealized holding loss arising
during the period .............. (1,046)
Less: reclassification adjustment
for gains included in net income (1,083)
---------
Comprehensive income ...............
Partnership distribution ........... (39,930) (766)
Sale of Common Units under
public offering, net of expenses . 2,353 47,079
Grants issued under Restricted
Unit Plan, net of forfeitures .... 1,011 (1,011)
Amortization of Compensation
Deferral Plan .................... 169
Amortization of Restricted
Unit Plan, net of forfeitures .... -- -- -- -- -- 165 --
--------------- ----------- ------- ------------ -------- ------------ -------------
Balance at June 30, 2001 ........... 24,632 $ 140,508 $ 2,560 $ (11,567) $ 11,567 $ (1,317) $ --
=============== =========== ======= ============ ======== ============ =============
Total
Partners' Comprehensive
Capital Income
--------- -------------
Balance at September 30, 2000 ..... $ 61,829
Net income ......................... 75,334 $ 75,334
Other comprehensive income:
Unrealized holding loss arising
during the period .............. (1,046) (1,046)
Less: reclassification adjustment
for gains included in net income (1,083) (1,083)
--------- ---------
Comprehensive income ............... $ 73,205
=========
Partnership distribution ........... (40,696)
Sale of Common Units under
public offering, net of expenses.. 47,079
Grants issued under Restricted
Unit Plan, net of forfeitures .... --
Amortization of Compensation
Deferral Plan .................... 169
Amortization of Restricted
Unit Plan, net of forfeitures .... 165
---------
Balance at June 30, 2001 ........... $ 141,751
=========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
7
SUBURBAN PROPANE PARTNERS, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2001
(Dollars in Thousands)
(Unaudited)
1. PARTNERSHIP ORGANIZATION AND FORMATION
--------------------------------------
Suburban Propane Partners, L.P. (the "Partnership") and its subsidiary, Suburban
Propane, L.P. (the "Operating Partnership"), were formed as Delaware limited
partnerships on December 19, 1995 to acquire and operate the propane business
and assets of Suburban Propane, a division of Quantum Chemical Corporation (the
"Predecessor Company"). The Partnership completed an initial public offering of
Common Units on March 5, 1996. 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. Also, Suburban Holdings, Inc., a subsidiary of the
Operating Partnership, was formed on January 5, 2001 to hold the stock of Gas
Connection, Inc., Suburban @ Home, Inc. and Suburban Franchising, Inc. Gas
Connection, Inc. sells and installs natural gas and propane gas grills,
fireplaces and related accessories and supplies; Suburban @ Home, Inc. operates
a heating and air conditioning business 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".
On May 26, 1999, the Partnership completed a recapitalization (the
"Recapitalization") which included the redemption of all limited partner
interests held by the former general partner, Suburban Propane GP, Inc., a
wholly-owned indirect subsidiary of Millennium Chemicals, Inc., and the
substitution of a new general partner, Suburban Energy Services Group LLC, which
is owned by senior management of the Partnership.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
--------------------------------------------------------------------
BASIS OF PRESENTATION. The condensed consolidated financial statements include
the accounts of the Partnership Entities. All significant intercompany
transactions and accounts have been eliminated. The accompanying condensed
consolidated financial statements are unaudited and have been prepared in
accordance with the rules and regulations of the Securities and Exchange
Commission. They include all adjustments which the Partnership considers
necessary for a fair statement of the results for the interim period presented.
Such adjustments consisted only of normal recurring items unless otherwise
disclosed. These financial statements should be read in conjunction with the
Partnership's Annual Report on Form 10-K for the fiscal year ended September 30,
2000, including management's discussion of financial results contained therein.
Due to the seasonal nature of the Partnership's propane business, the results of
operations for interim periods are not necessarily indicative of the results to
be expected for a full year.
FISCAL PERIOD. The Partnership's fiscal periods end on the Saturday nearest the
end of the quarter.
8
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.
DERIVATIVE INSTRUMENTS. The Partnership routinely uses propane futures and
forward contracts to reduce the risk of future price fluctuations and to help
ensure supply during periods of high demand. Effective October 1, 2000, the date
of adoption of a new accounting pronouncement for derivative instruments,
management determined that the Partnership's derivative instruments do not
qualify as hedges. Accordingly, such contracts are recorded as assets or
liabilities based on their fair value and any subsequent changes in the fair
values of such contracts are recorded in income. These amounts are included in
other current assets, other current liabilities and operating expenses,
respectively. For the nine months ended June 30, 2001, the Partnership recorded
an unrealized loss of $3,351, representing the net change in the fair values of
the Partnership's derivatives during that period. See "Adoption of New
Accounting Standard" for further information.
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 estimates average cost.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are stated at cost.
Depreciation of property, plant and equipment is computed using the
straight-line method over the estimated service lives, which range from three to
forty years.
Accumulated depreciation at June 30, 2001 and September 30, 2000 was $210,949
and $198,549, respectively.
GOODWILL AND OTHER INTANGIBLE ASSETS. Goodwill and other intangible assets are
comprised of the following:
June 30, 2001 September 30, 2000
------------- ------------------
Goodwill $296,224 $296,201
Debt origination costs 8,024 8,024
Deferred credit agreement costs 1,753 3,123
Other, principally noncompete agreements 4,540 4,940
-------- --------
310,541 312,288
Less: Accumulated amortization 55,836 50,671
-------- --------
$254,705 $261,617
======== ========
9
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
attributed 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 condensed consolidated
financial statements relating to the earnings of the Partnership and the
Operating Partnership. The earnings attributed to the corporate entities are
subject to federal and state income taxes. Accordingly, the Partnership's
condensed consolidated financial statements reflect income tax expense related
to the corporate entities' earnings.
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, and makes the pro forma
information disclosures required under the provisions of Statement of Financial
Accounting Standard ("SFAS") No. 123, "Accounting for Stock-Based Compensation".
Upon issuance of Units under the compensation plans, unearned compensation
equivalent to the market value of the Restricted Units granted under the
restricted unit plans, or Common Units granted under the Compensation Deferral
Plan (the "Deferral Plan"), is charged at the date of grant. The unearned
compensation is amortized ratably over the restricted periods. The unamortized
unearned compensation value is shown as a reduction of partners' capital in the
accompanying condensed consolidated balance sheets. As a result of the May 26,
1999 Recapitalization, all unamortized compensation related to the Restricted
Units, issued under the 1996 Restricted Unit Award Plan, was earned and expense
of $11,393 was recorded. As of June 30, 2001, no Units were outstanding under
the 1996 Restricted Unit Award Plan, 42,925 Common Units were outstanding under
the Deferral Plan and 48,960 Restricted Units were outstanding under the 2000
Restricted Unit Plan. See Notes 6 and 7 for further information.
NET INCOME (LOSS) PER UNIT. Basic net income (loss) per limited partner Unit is
computed by dividing net income (loss), after deducting the General Partner's
approximate 2% interest, by the weighted average number of outstanding Common
Units. Diluted net income (loss) per limited partner Unit is computed by
dividing net income (loss), after deducting the General Partner's approximate 2%
interest, by the weighted average number of outstanding Common Units, time
vested Restricted Units granted under the 2000 Restricted Unit Plan and time
vested Common Units granted under the Deferral Plan.
ADOPTION OF NEW ACCOUNTING STANDARD. Effective with the first fiscal quarter of
2001, the Partnership adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133") as amended by SFAS No. 137 and
SFAS No. 138. SFAS 133 requires entities to record derivatives as assets or
liabilities on the balance sheet based on their fair value with any subsequent
changes in the fair values of contracts recorded in income, unless the contracts
qualify as hedges. Contracts qualifying for hedge accounting would have changes
in fair values reported as a component of comprehensive income (equity). Based
on the criteria set forth in SFAS 133, management determined that the
Partnership's derivative contracts do not qualify for hedge accounting and its
derivatives are marked-to-market through income. The fair market value of the
Partnership's derivative portfolio on the date of adoption did not reflect any
unrealized net gain or loss and accordingly, no cumulative effect of this change
in accounting is reflected in the accompanying condensed consolidated financial
statements.
10
RECENTLY ISSUED ACCOUNTING STANDARDS. In July 2001, the Financial Accounting
Standards Board issued SFAS No. 141, "Business Combinations" ("SFAS 141"), and
SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). Under the
provisions of SFAS 141, all business combinations initiated after June 30, 2001
are required to be accounted for under the purchase method of accounting. Under
the provisions of SFAS 142, goodwill will no longer be amortized but will be
subject to a transitional impairment review and to annual impairment reviews in
accordance with the SFAS. SFAS 142 is effective for fiscal years beginning after
December 15, 2001, but early adoption is permitted for companies with a fiscal
year beginning after March 15, 2001. The Partnership is currently in the process
of evaluating the impact SFAS 142 will have on the consolidated financial
position and consolidated results of operations of the Partnership.
RECLASSIFICATIONS. Certain prior period balances have been reclassified to
conform to the current period presentation.
3. DISTRIBUTIONS OF AVAILABLE CASH
-------------------------------
The Partnership makes distributions to its partners 45 days after the end of
each fiscal quarter in an aggregate amount equal to its Available Cash for such
quarter. Available Cash generally means all cash on hand at the end of the
fiscal quarter less the amount of cash reserves established by the Board of
Supervisors in its reasonable discretion for future cash requirements. The
agreement the Partnership made in connection with its Recapitalization to
maintain certain levels of committed availability under its Credit Agreement to
support the Minimum Quarterly Distribution expired on March 31, 2001.
4. COMMITMENTS AND CONTINGENCIES
-----------------------------
The Partnership leases certain property, plant and equipment for various periods
under noncancelable leases. Rental expense under operating leases was $17,818
and $14,797 for the nine months ended June 30, 2001 and June 24, 2000,
respectively.
The Partnership effectively is self-insured for general and product, workers'
compensation and automobile liabilities up to predetermined amounts above which
third party insurance applies. At June 30, 2001 and September 30, 2000, accrued
insurance liabilities amounted to $26,120 and $25,628, respectively,
representing the total estimated losses under these self-insurance programs.
These liabilities represent the gross estimated losses as no claims or lawsuits,
individually or in the aggregate, were estimated to exceed the Partnership's
deductibles on its insurance policies.
The Partnership is also involved in various legal actions that have arisen in
the normal course of business including those relating to commercial
transactions and product liability. Management believes 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-insured liability for known and unasserted claims.
11
5. LONG-TERM DEBT AND REVOLVING CREDIT AGREEMENT
---------------------------------------------
On March 5, 1996, the Operating Partnership issued $425,000 of Senior Notes with
an annual interest rate of 7.54%. The Operating Partnership's obligations under
the Senior Note Agreement are unsecured and rank on an equal and ratable basis
with the Operating Partnership's obligations under the Revolving Credit
Agreement discussed below. The Senior Notes will mature June 30, 2011. The Note
Agreement requires that the principal be paid in equal annual installments of
$42,500 starting June 30, 2002.
At June 30, 2001, the Revolving Credit Agreement, as amended on January 29,
2001, consists of a $50,000 acquisition facility and a $75,000 working capital
facility. Borrowings under the Revolving Credit Agreement, which expires on May
31, 2003, bear interest at a rate based upon either LIBOR plus a margin, First
Union National Bank's prime rate or the Federal Funds rate plus 1/2 of 1%. An
annual fee ranging from .375% to .50%, based upon certain financial tests, is
payable quarterly whether or not borrowings occur. As of June 30, 2001, the fee
was .50%.
As of June 30, 2001, $46,000 was outstanding under the acquisition facility
resulting from the acquisition of SCANA and no amount was outstanding under the
working capital facility. As of September 30, 2000, $90,000 was outstanding
under the acquisition facility and $6,500 was outstanding under the working
capital facility.
The Senior Note Agreement and Revolving Credit Agreement contain various
restrictive and affirmative covenants applicable to the Operating Partnership,
including (i) maintenance of certain financial tests, (ii) restrictions on the
incurrence of additional indebtedness, and (iii) restrictions on certain liens,
investments, guarantees, loans, advances, payments, mergers, consolidations,
distributions, sales of assets and other transactions.
6. COMPENSATION DEFERRAL PLAN
--------------------------
Effective May 26, 1999, in connection with the Partnership's Recapitalization,
the Partnership adopted the Deferral Plan which provided for eligible employees
of the Partnership to surrender their right to receive all or a portion of their
unvested Common Units granted under the Partnership's 1996 Restricted Unit Award
Plan prior to the time their Common Units were substantially certain to vest in
exchange for the right to participate in and receive certain payments under the
Deferral Plan. Senior management of the Partnership surrendered 553,896
Restricted Units representing substantially all of their Restricted Units,
before they vested in exchange for the right to participate in the Deferral
Plan. The Partnership deposited into a trust on behalf of these individuals
553,896 Common Units.
The Deferral Plan also allows eligible employees to defer receipt of Common
Units that may be subsequently granted by the Partnership under the Deferral
Plan. The Common Units granted under the Deferral Plan and related Partnership
distributions are subject to forfeiture provisions such that (a) 100% of the
Common Units would be forfeited if the grantee ceases to be employed by the
Partnership within three years of the date of the Recapitalization, (b) 75%
would be forfeited if the grantee ceases to be employed after the third
anniversary, but prior to the fourth anniversary of the Recapitalization date
and (c) 50% would be forfeited if the grantee ceases to be employed
12
after the fourth anniversary, but prior to the fifth anniversary. Upon issuance
of Common Units under the Deferral Plan, unearned compensation equivalent to the
market value of the Common Units is charged at the date of grant. 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 condensed consolidated balance sheets.
During the nine months ended June 30, 2001, the Partnership amortized $169 of
unearned compensation.
Following is a summary of units outstanding in the Deferral Plan:
Units Value Per Unit
------- --------------
Outstanding, September 30, 2000 and
June 30, 2001 42,925 $19.91
====== ======
Pursuant to the Deferral Plan, participants have deferred receipt of these
Common Units and related distributions by the Partnership by depositing the
Units into a trust. The value of the Common Units deposited in the trust and the
related deferred compensation trust liability are reflected in the accompanying
condensed consolidated balance sheets as components of partners' capital.
7. 2000 Restricted Unit Plan
-------------------------
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 such units
vesting at the end of each of the third and fourth anniversaries of the issuance
date and the remaining 50% of such units vesting at the end of the fifth
anniversary of the issuance date. 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. During the nine months ended June 30, 2001, the
Partnership amortized $165 of unearned compensation associated with the 2000
Restricted Unit Plan.
Following is a summary of activity in the 2000 Restricted Unit Plan:
Units Value Per Unit
------- --------------
Outstanding, September 30, 2000 - $ -
Awarded 78,228 $20.66
Forfeited (29,268) $20.66
------- ------
Outstanding, June 30, 2001 48,960 $20.66
======= ======
13
8. Public Offering
---------------
In the first quarter of fiscal 2001, the Partnership sold 2,352,700 Common Units
in a public offering at a price of $21.125 per Unit realizing proceeds of
$47,079, net of underwriting commissions and other offering expenses, all of
which was applied to reduce outstanding borrowings under the Partnership's
Revolving Credit Agreement. This transaction increased the total number of
Common Units outstanding to 24,631,287.
9. Subsequent Events
-----------------
On July 26, 2001, the Partnership announced a quarterly distribution of $.55 per
Common Unit for the third quarter of fiscal 2001 consisting of the Minimum
Quarterly Distribution of $.50 per Common Unit and an additional distribution of
$.05 per Common Unit payable on August 14, 2001 to holders of record on August
6, 2001.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
- -----------------------------------------------
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended,
relating to the Partnership's future business expectations and predictions and
financial condition and results of operations. These forward-looking statements
involve certain risks and uncertainties. Important factors that could cause
actual results to differ materially from those discussed in such forward-looking
statements ("cautionary statements") include, among other things: the impact of
weather conditions on the demand for propane; fluctuations in the unit cost of
propane; the ability of the Partnership to compete with other suppliers of
propane and other energy sources; the ability of the Partnership to retain and
acquire customers; the Partnership's ability to implement its expansion strategy
and to integrate acquired businesses successfully; the impact of energy
efficiency and technology advances on the demand for propane; the ability of
management to continue to control expenses; the impact of regulatory
developments on the Partnership's business; and the impact of legal proceedings
on the Partnership's business. All subsequent written and oral forward-looking
statements attributable to the Partnership or persons acting on its behalf are
expressly qualified in their entirety by such cautionary statements.
THREE MONTHS ENDED JUNE 30, 2001
- --------------------------------
COMPARED TO THREE MONTHS ENDED JUNE 24, 2000
- --------------------------------------------
REVENUES
Revenues decreased 6.9% or $10.7 million to $143.3 million for the three months
ended June 30, 2001 compared to $154.0 million for the three months ended June
24, 2000. The overall decrease is primarily attributable to a decrease in retail
gallons sold due to warmer weather occurring at the beginning of the quarter. In
addition, the Partnership believes that this decrease is partially due to
customer conservation efforts in response to higher propane selling prices
resulting from increased propane product costs. Propane sold to retail customers
decreased 6.6% or 6.4 million gallons to 90.1 million gallons, compared to 96.5
million gallons in the prior period's quarter. Sales prices averaged
approximately 12% higher during the three months ended June 30, 2001 as compared
to the prior period's quarter. Temperatures nationwide were 14% warmer than
normal during the three month period as compared to 5% warmer than normal in the
prior year period. Wholesale gallons sold and gallons sold related to price risk
management activities decreased 82.4% or 39.0 million gallons to 8.3 million
gallons, principally resulting from decreased market opportunities attributable
to the high propane cost and limited supply environment, as compared to the
prior period's quarter.
OPERATING EXPENSES
Operating expenses increased 19.8% or $10.5 million to $63.4 million for the
three months ended June 30, 2001 compared to $52.9 million for the three months
ended June 24, 2000. The increase in operating expenses is principally
attributable to a $5.1 million unrealized loss under SFAS 133 representing the
net change in the fair values of the Partnership's derivatives during the
quarter, increased payroll and benefit costs, including increased compensation
accruals associated with field incentive programs, and higher provisions for bad
debts resulting from the increases in selling prices.
15
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses decreased 22.4% or $1.5 million to $5.1
million for the three months ended June 30, 2001 compared to $6.6 million for
the three months ended June 24, 2000. The decrease is primarily attributable to
gains realized in the current quarter associated with the sales of non-strategic
assets and a corporate investment.
(LOSS) BEFORE INTEREST EXPENSE AND INCOME TAXES AND EBITDA
(Loss) before interest expense and income taxes increased $5.1 million to $(5.5)
million in the three months ended June 30, 2001 compared to $(0.4) million in
the prior year's third quarter. EBITDA decreased $5.5 million or 58.5% to $3.9
million. These changes in (loss) before interest expense and income taxes and in
EBITDA are primarily attributable to the $5.1 million net unrealized loss
recorded under the provisions of SFAS 133 in the current quarter. Increased
gross profit of $3.5 million, associated with higher per gallon margins and
lower general and administrative expenses of $1.5 million were offset by
increased operating expenses of $5.4 million excluding the SFAS 133 unrealized
loss noted above.
EBITDA should not be considered as an alternative to net income (as an indicator
of operating performance) or as an alternative to cash flow (as a measure of
liquidity or ability to service debt obligations) and is not in accordance with
or superior to generally accepted accounting principles but provides additional
information for evaluating the Partnership's ability to distribute the Minimum
Quarterly Distribution. Because EBITDA excludes some, but not all, items that
affect net income and this measure may vary among companies, the EBITDA data
presented above may not be comparable to similarly titled measures of other
companies.
INTEREST EXPENSE
Net interest expense decreased $1.3 million or 13.0% to $8.9 million for the
three months ended June 30, 2001 compared to $10.2 million in the prior period's
quarter. This decrease is primarily attributable to lower outstanding borrowings
under the revolving credit agreement associated with the paydown of the
acquisition facility.
NINE MONTHS ENDED JUNE 30, 2001
- -------------------------------
COMPARED TO NINE MONTHS ENDED JUNE 24, 2000
- -------------------------------------------
REVENUES
Revenues increased 22.4% or $144.7 million to $790.0 million for the nine months
ended June 30, 2001 compared to $645.3 million for the nine months ended June
24, 2000. The overall increase is primarily attributable to higher propane costs
resulting in higher sales prices to customers. Propane sold to retail customers
increased 2.4% or 10.2 million gallons to 439.1 million gallons compared to
428.9 million gallons in the prior period. The increase in gallons is
principally due to colder temperatures, which nationwide were 3% colder than
normal during the nine month period as compared to 12% warmer than normal in the
prior year period. The effect of colder temperatures was partially offset by
customer conservation efforts resulting from the high cost of propane during
16
the current nine month period. Wholesale gallons sold and gallons sold related
to price risk management activities decreased 31.9% or 59.6 million gallons to
127.2 million gallons, principally resulting from the high propane cost and
limited supply environment during the current nine month period as compared to
the prior year period.
OPERATING EXPENSES
Operating expenses increased 14.8% or $24.8 million to $192.4 million for the
nine months ended June 30, 2001 compared to $167.6 million for the nine months
ended June 24, 2000. The increase in operating expenses is principally
attributable to increased payroll and benefit costs, including increased
incentive compensation accruals in line with higher earnings, higher provisions
for bad debts resulting from the increases in selling prices, higher insurance,
increased vehicle fuel costs and unrealized losses recorded under the provisions
of SFAS 133 related to changes in fair values of the Partnership's derivatives.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased 11.6% or $2.4 million to $22.6
million for the nine months ended June 30, 2001 compared to $20.2 million for
the nine months ended June 24, 2000. The increase is primarily attributable to
higher payroll and benefit costs, including incentive compensation accruals in
line with higher earnings, increased costs for professional services and higher
equipment leasing costs offset in part by gains realized on the sales of
non-strategic assets and corporate investments.
INCOME BEFORE INTEREST EXPENSE AND INCOME TAXES AND EBITDA
Results for the nine month period ended June 30, 2000 include a $10.3 million
gain from the sale of assets. Excluding this one-time item, income before
interest expense and income taxes increased $28.5 million to $104.8 million in
the nine months ended June 30, 2001 compared to $76.3 million in the prior
year's comparable period. EBITDA, excluding the one-time item, increased $28.8
million or 27.4% to $133.9 million. The increases in income before interest
expense and income taxes and in EBITDA are primarily attributable to higher
gross profit of $56.0 million reflecting higher retail volumes and margins,
partially offset by increased operating, general and administrative expenses.
EBITDA should not be considered as an alternative to net income (as an indicator
of operating performance) or as an alternative to cash flow (as a measure of
liquidity or ability to service debt obligations) and is not in accordance with
or superior to generally accepted accounting principles but provides additional
information for evaluating the Partnership's ability to distribute the Minimum
Quarterly Distribution. Because EBITDA excludes some, but not all, items that
affect net income and this measure may vary among companies, the EBITDA data
presented above may not be comparable to similarly titled measures of other
companies.
INTEREST EXPENSE
Net interest expense decreased $0.7 million to $29.2 million in the nine months
ended June 30, 2001 compared with $29.9 million in the prior period. The
decrease is primarily attributable to lower outstanding borrowings under the
revolving credit facility resulting from the paydown of the acquisition
facility.
17
LIQUIDITY AND CAPITAL RESOURCES
Due to the seasonal nature of the propane business, cash flows from operating
activities are greater during the winter and spring seasons as customers pay for
propane purchased during the heating season. For the nine months ended June 30,
2001, net cash provided by operating activities was $84.0 million compared to
cash provided by operating activities of $47.6 million in the nine months ended
June 24, 2000. The increase of $36.4 million was primarily due to higher net
income, excluding the gain on sale of assets in the prior year period, and
favorable changes in working capital reflecting collections on higher accounts
receivable levels and increased incentive compensation accruals.
Net cash used in investing activities was $12.1 million during the nine months
ended June 30, 2001 consisting of capital expenditures of $16.1 million
(including $4.5 million for maintenance expenditures and $11.6 million to
support the growth of operations), offset by proceeds from the sales of
property, plant and equipment of $4.0 million. Net cash used in investing
activities was $92.4 million during the nine months ended June 30, 2000
consisting of acquisition payments of $98.0 million reflecting the SCANA
acquisition and capital expenditures of $14.3 million (including $6.1 million
for maintenance expenditures and $8.2 million to support the growth of
operations), offset by proceeds from the sale of property, plant and equipment
of $19.9 million, including 23 customer service centers.
Net cash used in financing activities for the nine months ended June 30, 2001
was $45.2 million, reflecting $47.1 million in net proceeds received from the
sale of Common Units in a public offering, offset by $50.9 million of net
repayments of amounts outstanding under the Partnership's Revolving Credit
Agreement utilizing the proceeds of the public offering, $0.7 million in costs
incurred to amend the Revolving Credit Agreement and $40.7 million in
Partnership distributions. Net cash provided by financing activities for the
nine months ended June 24, 2000 was $48.3 million, principally reflecting
borrowings to fund the SCANA acquisition and working capital borrowings
partially offset by the Partnership's distribution.
Effective January 29, 2001, the Partnership amended its Revolving Credit
Agreement. Pursuant to the amendment, the acquisition facility has been reduced
from $100.0 million to $50.0 million, the working capital facility has been
retained at $75.0 million and both facilities have been extended until May 31,
2003. The minimum net worth covenant has been eliminated and the maximum
leverage ratio has been reduced to 5.00 to 1 for quarters after March 31, 2001.
Borrowings bear interest at a rate based upon either LIBOR plus a maximum margin
of 2% or the agent bank's base rate plus a margin of 1% (in each case such
margin to reduce according to improvements in the leverage ratio.) An annual fee
of .50% (also subject to reduction according to improvements in the leverage
ratio) is payable quarterly whether or not borrowings are made.
The Partnership has announced that it will make a distribution of $.55 per Unit
to its Common Unitholders on August 14, 2001 for the third fiscal quarter of
2001, consisting of the Minimum Quarterly Distribution of $.50 per Common Unit
and an additional distribution of $.05 per Common Unit.
18
Under the terms of the Senior Note Agreement, the first annual principal
installment of $42,500 is due on June 30, 2002. The Partnership intends to
refinance such amount and has initiated discussions with various third parties
to reach a refinancing agreement with favorable terms to the Partnership.
Alternatively, the Partnership currently expects that it will generate
sufficient funds from operations, or have available adequate borrowing capacity
under its working capital facility, to make the principal payment. However, the
Partnership cannot predict whether it will be successful in negotiating a
favorable refinancing agreement, have adequate available borrowing capacity
under its working capital facility or generate sufficient excess funds to meet
the principal obligation.
The ability of the Partnership to satisfy its future obligations will depend on
its future performance, which will be subject to prevailing economic, financial,
business and weather conditions and other factors, many of which are beyond its
control. Based on its current cash position, available Credit Facilities and
expected cash flow from operating activities, the Partnership expects to have
sufficient funds to meet its obligations and working capital needs, and pay
distributions at the current level, during the balance of fiscal 2001.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of June 30, 2001, the Partnership was party to propane forward and option
contracts with various third parties and futures traded on the New York
Mercantile Exchange ("NYMEX"). Forward and futures contracts require that the
Partnership sell or acquire propane at a fixed price at fixed future dates. An
option contract allows, but does not require its holder to buy or sell propane
at a specified price during a specified time period; the writer of an option
contract must fulfill the obligation of the option contract, should the holder
choose to exercise the option. At expiration, the contracts are settled by the
delivery of propane to the respective party or are settled by the payment of a
net amount equal to the difference between the then current price of propane and
the fixed contract price. The contracts are entered into in anticipation of
market movements and to manage and hedge exposure to fluctuating propane prices.
Market risks associated with the trading of futures and forward contracts are
monitored daily for compliance with the Partnership's trading policy which
includes volume limits for open positions. Open inventory positions are reviewed
and managed daily as to exposures to changing market prices.
MARKET RISK
The Partnership is subject to commodity price risk to the extent that propane
market prices deviate from fixed contract settlement amounts. Futures contracts
traded with brokers of the NYMEX require daily cash settlements in margin
accounts. Forward and option contracts are generally settled at the expiration
of the contract term.
19
CREDIT RISK
Futures contracts are guaranteed by the NYMEX and as a result have minimal
credit risk. The Partnership is subject to credit risk with forward and option
contracts to the extent the counterparties do not perform. The Partnership
evaluates the financial condition of each counterparty with which it conducts
business and establishes credit limits to reduce exposure to credit risk of
non-performance.
SENSITIVITY ANALYSIS
In an effort to estimate the exposure of unfavorable market price movements, a
sensitivity analysis of open positions as of June 30, 2001 was performed. Based
on this analysis, a hypothetical 10% adverse change in market prices for each of
the future months for which an option, futures and/or forward contract exists
indicates a potential loss in future earnings of $0.8 million as of June 30,
2001. See also Item 7A of the Partnership's Annual Report on Form 10-K for the
fiscal year ended September 30, 2000.
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.
20
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Reports on Form 8-K
None.
21
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the registrant has
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized:
SUBURBAN PROPANE PARTNERS, L.P.
Date: August 13, 2001 By /s/ Robert M. Plante
---------------------------------
Robert M. Plante
Vice President, Finance and Treasurer
By /s/ Edward J. Grabowiecki
---------------------------------
Edward J. Grabowiecki
Vice President and Controller and
Chief Accounting Officer
22