Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended March 27, 2010
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o |
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission File Number: 1-14222
SUBURBAN PROPANE PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
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Delaware
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22-3410353 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
240 Route 10 West
Whippany, NJ 07981
(973) 887-5300
(Address, including zip code, and telephone number,
including area code, of registrants principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). *
Yes o No o
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* |
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The registrant has not yet been phased into the interactive data requirements. |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
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(do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
SUBURBAN PROPANE PARTNERS, L.P. AND SUBSIDIARIES
INDEX TO FORM 10-Q
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements (Forward-Looking
Statements) as defined in the Private Securities Litigation Reform Act of 1995 and Section 27A of
the Securities Act of 1933, as amended, relating to future business expectations and predictions
and financial condition and results of operations of Suburban Propane Partners, L.P. (the
Partnership). Some of these statements can be identified by the use of forward-looking
terminology such as prospects, outlook, believes, estimates, intends, may, will,
should, anticipates, expects or plans or the negative or other variation of these or
similar words, or by discussion of trends and conditions, strategies or risks and uncertainties.
These Forward-Looking Statements involve certain risks and uncertainties that could cause actual
results to differ materially from those discussed or implied in such Forward-Looking Statements
(statements contained in this Quarterly Report identifying such risks and uncertainties are
referred to as Cautionary Statements). The risks and uncertainties and their impact on the
Partnerships results include, but are not limited to, the following risks:
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The impact of weather conditions on the demand for propane, fuel oil and other refined
fuels, natural gas and electricity; |
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Volatility in the unit cost of propane, fuel oil and other refined fuels and natural gas,
the impact of the Partnerships hedging and risk management activities, and the adverse impact
of price increases on volumes as a result of customer conservation; |
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The ability of the Partnership to compete with other suppliers of propane, fuel oil and
other energy sources; |
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The impact on the price and supply of propane, fuel oil and other refined fuels from the
political, military or economic instability of the oil producing nations, global terrorism and
other general economic conditions; |
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The ability of the Partnership to acquire and maintain reliable transportation for its
propane, fuel oil and other refined fuels; |
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The ability of the Partnership to retain customers; |
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The impact of customer conservation, energy efficiency and technology advances on the
demand for propane and fuel oil; |
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The ability of management to continue to control expenses; |
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The impact of changes in applicable statutes and government regulations, or their
interpretations, including those relating to the environment and global warming, derivative
instruments and other regulatory developments on the Partnerships business; |
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The impact of changes in tax regulations that could adversely affect the tax treatment of
the Partnership for federal income tax purposes; |
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The impact of legal proceedings on the Partnerships business; |
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The impact of operating hazards that could adversely affect the Partnerships operating
results to the extent not covered by insurance; |
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The Partnerships ability to make strategic acquisitions and successfully integrate them; |
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The impact of current conditions in the global capital and credit markets, and general
economic pressures; and |
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Other risks referenced from time to time in filings with the Securities and Exchange
Commission (SEC) and those factors listed or incorporated by reference into the
Partnerships Annual Report under Risk Factors, |
Some of these Forward-Looking Statements are discussed in more detail in Managements Discussion
and Analysis of Financial Condition and Results of Operations in this Quarterly Report. Reference
is also made to the risk factors discussed in Item 1A of our Annual Report on Form 10-K for the
fiscal year ended September 26, 2009. On different occasions, the Partnership or its
representatives have made or may make Forward-Looking Statements in other filings with the SEC,
press releases or oral statements made by or with the approval of one of the Partnerships
authorized executive officers. Readers are cautioned not to place undue reliance on
Forward-Looking Statements, which reflect managements view only as of the date made. The
Partnership undertakes no obligation to update any Forward-Looking Statement or Cautionary
Statement except as otherwise required by law. All subsequent written and oral Forward-Looking
Statements attributable to the Partnership or persons acting on its behalf are expressly qualified
in their entirety by the Cautionary Statements in this Quarterly Report and in future SEC reports.
SUBURBAN PROPANE PARTNERS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
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March 27, |
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September 26, |
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2010 |
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2009 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
140,912 |
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$ |
163,173 |
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Accounts receivable, less allowance for doubtful accounts
of $7,624 and $4,374, respectively |
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136,496 |
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52,035 |
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Inventories |
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66,384 |
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70,158 |
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Other current assets |
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18,268 |
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22,190 |
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Total current assets |
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362,060 |
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307,556 |
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Property, plant and equipment, net |
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351,348 |
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357,187 |
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Goodwill |
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274,897 |
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274,897 |
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Other assets |
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41,907 |
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37,874 |
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Total assets |
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$ |
1,030,212 |
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$ |
977,514 |
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LIABILITIES AND PARTNERS CAPITAL |
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Current liabilities: |
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Accounts payable |
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$ |
46,186 |
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$ |
35,677 |
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Accrued employment and benefit costs |
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26,782 |
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40,875 |
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Customer deposits and advances |
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36,710 |
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69,789 |
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Other current liabilities |
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25,587 |
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33,718 |
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Total current liabilities |
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135,265 |
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180,059 |
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Long-term borrowings |
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347,845 |
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349,415 |
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Accrued insurance |
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48,864 |
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41,838 |
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Other liabilities |
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45,894 |
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46,485 |
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Total liabilities |
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577,868 |
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617,797 |
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Commitments and contingencies |
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Partners capital: |
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Common Unitholders (35,290 and 35,228 units issued and outstanding at
March 27, 2010 and September 26, 2009, respectively) |
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511,031 |
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421,005 |
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Accumulated other comprehensive loss |
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(58,687 |
) |
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(61,288 |
) |
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Total partners capital |
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452,344 |
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359,717 |
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Total liabilities and partners capital |
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$ |
1,030,212 |
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$ |
977,514 |
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The accompanying notes are an integral part of these condensed
consolidated financial statements.
1
SUBURBAN PROPANE PARTNERS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per unit amounts)
(unaudited)
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Three Months Ended |
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March 27, |
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March 28, |
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2010 |
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2009 |
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Revenues |
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Propane |
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$ |
369,341 |
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$ |
336,913 |
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Fuel oil and refined fuels |
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61,311 |
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65,138 |
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Natural gas and electricity |
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28,841 |
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32,093 |
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All other |
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9,670 |
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11,081 |
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469,163 |
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445,225 |
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Costs and expenses |
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Cost of products sold |
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248,459 |
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208,259 |
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Operating |
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78,508 |
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86,848 |
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General and administrative |
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20,257 |
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17,793 |
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Depreciation and amortization |
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7,142 |
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7,131 |
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354,366 |
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320,031 |
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Income before loss on debt extinguishment, interest expense
and provision for income taxes |
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114,797 |
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125,194 |
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Loss on debt extinguishment |
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9,473 |
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Interest expense, net |
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6,608 |
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9,442 |
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Income before provision for income taxes |
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98,716 |
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115,752 |
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Provision for income taxes |
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328 |
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886 |
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Net income |
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$ |
98,388 |
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$ |
114,866 |
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Income per Common Unit basic |
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$ |
2.78 |
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$ |
3.50 |
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Weighted average number of Common Units outstanding basic |
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35,343 |
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32,847 |
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Income per Common Unit diluted |
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$ |
2.76 |
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$ |
3.48 |
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Weighted average number of Common Units outstanding diluted |
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35,622 |
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33,051 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
2
SUBURBAN PROPANE PARTNERS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per unit amounts)
(unaudited)
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Six Months Ended |
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March 27, |
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March 28, |
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2010 |
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2009 |
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Revenues |
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Propane |
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$ |
602,872 |
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$ |
610,821 |
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Fuel oil and refined fuels |
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|
100,558 |
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|
119,329 |
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Natural gas and electricity |
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45,703 |
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54,374 |
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All other |
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21,462 |
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|
24,016 |
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770,595 |
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808,540 |
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Costs and expenses |
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Cost of products sold |
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398,825 |
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|
382,489 |
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Operating |
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152,995 |
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|
163,911 |
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General and administrative |
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33,995 |
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32,563 |
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Depreciation and amortization |
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14,226 |
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14,154 |
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|
600,041 |
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593,117 |
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Income before loss on debt extinguishment, interest expense
and provision for income taxes |
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170,554 |
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|
215,423 |
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Loss on debt extinguishment |
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|
9,473 |
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Interest expense, net |
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13,791 |
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18,845 |
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Income before provision for income taxes |
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147,290 |
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|
196,578 |
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Provision for income taxes |
|
|
527 |
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|
1,024 |
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Net income |
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$ |
146,763 |
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$ |
195,554 |
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Income per Common Unit basic |
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$ |
4.15 |
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$ |
5.96 |
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Weighted average number of Common Units outstanding basic |
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35,332 |
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|
32,832 |
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Income per Common Unit diluted |
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$ |
4.12 |
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$ |
5.93 |
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Weighted average number of Common Units outstanding diluted |
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35,581 |
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|
32,996 |
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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 CASH FLOWS
(in thousands)
(unaudited)
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Six Months Ended |
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March 27, |
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March 28, |
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2010 |
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2009 |
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Cash flows from operating activities: |
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Net income |
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$ |
146,763 |
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$ |
195,554 |
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Adjustments to reconcile net income to net cash provided by operations: |
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Depreciation and amortization |
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|
14,226 |
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|
14,154 |
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Amortization of debt origination costs and discount on long-term borrowings |
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|
994 |
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|
781 |
|
Compensation cost recognized under Restricted Unit Plan |
|
|
2,017 |
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|
1,241 |
|
Gain on disposal of property, plant and equipment, net |
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|
(134 |
) |
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|
(623 |
) |
Loss on debt extinguishment |
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|
9,473 |
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Deferred tax provision |
|
|
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|
460 |
|
Changes in assets and liabilities: |
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(Increase) in accounts receivable |
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(84,461 |
) |
|
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(29,307 |
) |
Decrease in inventories |
|
|
3,774 |
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|
17,641 |
|
Decrease in other current and noncurrent assets |
|
|
1,159 |
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|
10,540 |
|
Increase (decrease) in accounts payable |
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|
10,509 |
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|
(12,426 |
) |
(Decrease) increase in accrued employment and benefit costs |
|
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(14,093 |
) |
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|
9,742 |
|
(Decrease) in customer deposits and advances |
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(33,079 |
) |
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|
(26,796 |
) |
Increase in accrued insurance |
|
|
7,026 |
|
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|
3,906 |
|
(Decrease) in other current and noncurrent liabilities |
|
|
(6,843 |
) |
|
|
(25,915 |
) |
|
|
|
|
|
|
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Net cash provided by operating activities |
|
|
57,331 |
|
|
|
158,952 |
|
|
|
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|
|
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|
|
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Cash flows from investing activities: |
|
|
|
|
|
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|
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Capital expenditures |
|
|
(9,450 |
) |
|
|
(8,323 |
) |
Proceeds from sale of property, plant and equipment |
|
|
2,300 |
|
|
|
2,084 |
|
|
|
|
|
|
|
|
Net cash (used in) investing activities |
|
|
(7,150 |
) |
|
|
(6,239 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Cash flows from financing activities: |
|
|
|
|
|
|
|
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Repayments of long-term borrowings, including premium and fees |
|
|
(256,510 |
) |
|
|
(2,000 |
) |
Proceeds from long-term borrowings |
|
|
247,840 |
|
|
|
|
|
Issuance costs associated with long-term borrowings |
|
|
(5,018 |
) |
|
|
|
|
Partnership distributions |
|
|
(58,754 |
) |
|
|
(52,954 |
) |
|
|
|
|
|
|
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Net cash (used in) financing activities |
|
|
(72,442 |
) |
|
|
(54,954 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
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Net (decrease) increase in cash and cash equivalents |
|
|
(22,261 |
) |
|
|
97,759 |
|
Cash and cash equivalents at beginning of period |
|
|
163,173 |
|
|
|
137,698 |
|
|
|
|
|
|
|
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Cash and cash equivalents at end of period |
|
$ |
140,912 |
|
|
$ |
235,457 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
SUBURBAN PROPANE PARTNERS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF PARTNERS CAPITAL
(in thousands)
(unaudited)
|
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Accumulated |
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Other |
|
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Total |
|
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|
|
|
|
Number of |
|
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Common |
|
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Comprehensive |
|
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Partners |
|
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Comprehensive |
|
|
|
Common Units |
|
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Unitholders |
|
|
(Loss) |
|
|
Capital |
|
|
Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
Balance at September 26, 2009 |
|
|
35,228 |
|
|
$ |
421,005 |
|
|
$ |
(61,288 |
) |
|
$ |
359,717 |
|
|
|
|
|
Net income |
|
|
|
|
|
|
146,763 |
|
|
|
|
|
|
|
146,763 |
|
|
$ |
146,763 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains on cash flow
hedges |
|
|
|
|
|
|
|
|
|
|
192 |
|
|
|
192 |
|
|
|
192 |
|
Amortization of net actuarial losses
and prior service credits into earnings |
|
|
|
|
|
|
|
|
|
|
2,409 |
|
|
|
2,409 |
|
|
|
2,409 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
149,364 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partnership distributions |
|
|
|
|
|
|
(58,754 |
) |
|
|
|
|
|
|
(58,754 |
) |
|
|
|
|
Common Units issued under
Restricted Unit Plan |
|
|
62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation cost recognized under
Restricted Unit Plan, net of
forfeitures |
|
|
|
|
|
|
2,017 |
|
|
|
|
|
|
|
2,017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 27, 2010 |
|
|
35,290 |
|
|
$ |
511,031 |
|
|
$ |
(58,687 |
) |
|
$ |
452,344 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
SUBURBAN PROPANE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per unit amounts)
(unaudited)
1. Partnership Organization and Formation
Suburban Propane Partners, L.P. (the Partnership) is a publicly traded Delaware limited
partnership principally engaged, through its operating partnership and subsidiaries, in the retail
marketing and distribution of propane, fuel oil and refined fuels, as well as the marketing of
natural gas and electricity in deregulated markets. In addition, to complement its core marketing
and distribution businesses, the Partnership services a wide variety of home comfort equipment,
particularly for heating and ventilation. The publicly traded limited partner interests in the
Partnership are evidenced by common units traded on the New York Stock Exchange (Common Units),
with 35,290,334 Common Units outstanding at March 27, 2010. The holders of Common Units are
entitled to participate in distributions and exercise the rights and privileges available to
limited partners under the Third Amended and Restated Agreement of Limited Partnership (the
Partnership Agreement), adopted on October 19, 2006 following approval by Common Unitholders at
the Partnerships Tri-Annual Meeting and as thereafter amended by the Board of Supervisors on July
31, 2007, pursuant to the authority granted to the Board in the Partnership Agreement. Rights and
privileges under the Partnership Agreement include, among other things, the election of all members
of the Board of Supervisors and voting on the removal of the general partner.
Suburban Propane, L.P. (the Operating Partnership), a Delaware limited partnership, is the
Partnerships operating subsidiary formed to operate the propane business and assets. In addition,
Suburban Sales & Service, Inc. (the Service Company), a subsidiary of the Operating Partnership,
was formed to operate the service work and appliance and parts businesses of the Partnership. The
Operating Partnership, together with its direct and indirect subsidiaries, accounts for
substantially all of the Partnerships assets, revenues and earnings. The Partnership, the
Operating Partnership and the Service Company commenced operations in March 1996 in connection with
the Partnerships initial public offering.
The general partner of both the Partnership and the Operating Partnership is Suburban Energy
Services Group LLC (the General Partner), a Delaware limited liability company, the sole member
of which is the Partnerships Chief Executive Officer. Other than as a holder of 784 Common Units
that will remain in the General Partner, the general Partner does not have any economic interest in
the Partnership or the Operating Partnership.
During fiscal 2004, the Partnership acquired substantially all of the assets and operations of
Agway Energy Products, LLC, Agway Energy Services, Inc. and Agway Energy Services PA, Inc.
(collectively referred to as Agway Energy). The operations of Agway Energy consisted of the
distribution and marketing of propane, fuel oil and refined fuels, as well as the marketing of
natural gas and electricity. The Partnerships fuel oil and refined fuels, natural gas and
electricity and services businesses are structured as corporate entities (collectively referred to
as the Corporate Entity) and, as such, are subject to corporate level income tax.
Suburban Energy Finance Corporation, a direct wholly-owned subsidiary of the Partnership, was
formed on November 26, 2003 to serve as co-issuer, jointly and severally, with the Partnership of
the Partnerships senior notes.
2. Basis of Presentation
Principles of Consolidation. The condensed consolidated financial statements include the accounts
of the Partnership, the Operating Partnership and all of its direct and indirect subsidiaries. All
significant intercompany transactions and account balances have been eliminated. The Partnership
consolidates the results of operations, financial condition and cash flows of the Operating
Partnership as a result of the Partnerships 100% limited partner interest in the Operating
Partnership.
6
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 (SEC).
They include all adjustments that the Partnership considers necessary for a fair statement of the
results for the interim periods presented. Such adjustments consist only of normal recurring
items, unless otherwise disclosed. These financial statements should be read in conjunction with
the Partnerships Annual Report on Form 10-K for the fiscal year ended September 26, 2009,
including managements discussion and analysis of financial condition and results of operations
contained therein. Due to the seasonal nature of the Partnerships operations, the results of
operations for interim periods are not necessarily indicative of the results to be expected for a
full year.
Fiscal Period. The Partnerships fiscal periods typically end on the last Saturday of the quarter.
Revenue Recognition. Sales of propane, fuel oil and refined fuels are recognized at the time
product is delivered to the customer. Revenue from the sale of appliances and equipment is
recognized at the time of sale or when installation is complete, as applicable. Revenue from
repairs, maintenance and other service activities is recognized upon completion of the service.
Revenue from service contracts is recognized ratably over the service period. Revenue from the
natural gas and electricity business is recognized based on customer usage as determined by meter
readings, as adjusted for amounts delivered but unbilled at the end of each accounting period.
Revenue from annually billed tank fees is deferred at the time of billing and recognized on a
straight-line basis over one year.
Fair Value Measurements. The Partnership measures certain of its assets and liabilities at fair
value, which is defined as the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants in either the principal market or
the most advantageous market. The principal market is the market with the greatest level of
activity and volume for the asset or liability.
The common framework for measuring fair value utilizes a three-level hierarchy to prioritize the
inputs used in the valuation techniques to derive fair values. The basis for fair value
measurements for each level within the hierarchy is described below with Level 1 having the highest
priority and Level 3 having the lowest.
|
|
Level 1: Quoted prices in active markets for identical assets or liabilities. |
|
|
|
Level 2: Quoted prices in active markets for similar assets or liabilities; quoted prices
for identical or similar instruments in markets that are not active; and model-derived
valuations in which all significant inputs are observable in active markets. |
|
|
|
Level 3: Valuations derived from valuation techniques in which one or more significant
inputs are unobservable. |
The Partnership measures the fair value of its options and futures derivative instruments using
Level 1 inputs and the fair value of its interest rate swap using Level 2 inputs. See the Note on
Financial Instruments Derivative Instruments and Hedging Activities, below, for additional
information regarding fair value measurements.
Use of Estimates. The preparation of financial statements in conformity with generally accepted
accounting principles (GAAP) requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during
the reporting period. Estimates have been made by management in the areas of depreciation and
amortization of long-lived assets, insurance and litigation reserves, pension and other
postretirement benefit liabilities and costs, valuation of derivative instruments, asset valuation
assessments, tax valuation allowances, as well as the allowance for doubtful accounts. Actual
results could differ from those estimates, making it reasonably possible that a change in these
estimates could occur in the near term.
Reclassifications. Certain prior period amounts have been reclassified to conform with the current
period presentation.
7
3. Financial Instruments
Cash and Cash Equivalents. The fair value of cash and cash equivalents is not materially different
from their carrying amount because of the short-term maturity of these instruments.
Derivative Instruments and Hedging Activities.
Commodity Price Risk. Given the retail nature of its operations, the Partnership maintains a
certain level of priced physical inventory to ensure its field operations have adequate supply
commensurate with the time of year. The Partnerships strategy is to keep its physical inventory
priced relatively close to market for its field operations. The Partnership enters into a
combination of exchange-traded futures and option contracts and, in certain instances,
over-the-counter option contracts (collectively, derivative instruments) to hedge price risk
associated with propane and fuel oil physical inventories, as well as future purchases of propane
or fuel oil used in its operations and to ensure adequate supply during periods of high demand.
Under this risk management strategy, realized gains or losses on derivative instruments will
typically offset losses or gains on the physical inventory once the product is sold. All of the
Partnerships derivative instruments are reported on the condensed consolidated balance sheet at
their fair values. In addition, in the course of normal operations, the Partnership routinely
enters into contracts such as forward priced physical contracts for the purchase or sale of propane
and fuel oil that qualify for and are designated as normal purchase or normal sale contracts. Such
contracts are exempted from the fair value accounting requirements and are accounted for at the
time product is purchased or sold under the related contract. The Partnership does not use
derivative instruments for speculative trading purposes. Market risks associated with futures,
options and forward contracts are monitored daily for compliance with the Partnerships Hedging and
Risk Management Policy which includes volume limits for open positions. Priced on-hand inventory
is also reviewed and managed daily as to exposures to changing market prices.
On the date that futures, options and forward contracts are entered into, other than those
designated as normal purchases or normal sales, the Partnership makes a determination as to whether
the derivative instrument qualifies for designation as a hedge. Changes in the fair value of
derivative instruments are recorded each period in current period earnings or other comprehensive
income (OCI), depending on whether the derivative instrument is designated as a hedge and, if so,
the type of hedge. For derivative instruments designated as cash flow hedges, the Partnership
formally assesses, both at the hedge contracts inception and on an ongoing basis, whether the
hedge contract is highly effective in offsetting changes in cash flows of hedged items. Changes in
the fair value of derivative instruments designated as cash flow hedges are reported in OCI to the
extent effective and reclassified into cost of products sold during the same period in which the
hedged item affects earnings. The mark-to-market gains or losses on ineffective portions of cash
flow hedges are recognized in cost of products sold immediately. Changes in the fair value of
derivative instruments that are not designated as cash flow hedges, and that do not meet the normal
purchase and normal sale exemption, are recorded within cost of products sold as they occur. Cash
flows associated with derivative instruments are reported as operating activities within the
condensed consolidated statement of cash flows.
Interest Rate Risk. A portion of the Partnerships borrowings bear interest at prevailing interest
rates based upon, at the Operating Partnerships option, LIBOR plus an applicable margin or the
base rate, defined as the higher of the Federal Funds Rate plus 1/2 of 1% or the agent banks prime
rate, or LIBOR plus 1%, plus the applicable margin. The applicable margin is dependent on the
level of the Partnerships total leverage (the ratio of total debt to income before deducting
interest expense, income taxes, depreciation and amortization (EBITDA)). Therefore, the
Partnership is subject to interest rate risk on the variable component of the interest rate. The
Partnership manages part of its variable interest rate risk by entering into interest rate swap
agreements. The interest rate swaps have been designated as, and are accounted for as, cash flow
hedges. The fair value of the interest rate swaps is determined using an income approach, whereby
future settlements under the swaps are converted into a single present value, with fair value being
based on the value of current market expectations about those future amounts. Changes in the fair
value are recognized in OCI until the hedged item is recognized in earnings. However, due to
changes in the underlying interest rate environment, the corresponding value in OCI is subject to
change prior to its impact on earnings.
8
The notional amount of the Partnerships outstanding derivative instruments includes the following
(gallons in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of |
|
Transaction Type |
|
March 27, 2010 |
|
|
September 26, 2009 |
|
Commodity Options |
|
|
661 |
|
|
|
6,467 |
|
Commodity Futures |
|
|
13,020 |
|
|
|
15,330 |
|
The following summarizes the gross fair value of the Partnerships derivative instruments and their
location in the condensed consolidated balance sheet as of March 27, 2010 and September 26, 2009,
respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 27, 2010 |
|
|
As of September 26, 2009 |
|
Asset Derivatives |
|
Location |
|
Fair Value |
|
|
Location |
|
Fair Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as
hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity options |
|
Other current assets |
|
$ |
1,044 |
|
|
Other current assets |
|
$ |
6,398 |
|
|
|
Other assets |
|
|
|
|
|
Other assets |
|
|
241 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity futures |
|
Other current assets |
|
|
9 |
|
|
Other current assets |
|
|
2,845 |
|
|
|
Other assets |
|
|
|
|
|
Other assets |
|
|
248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,053 |
|
|
|
|
|
|
$ |
9,732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability Derivatives |
|
Location |
|
Fair Value |
|
|
Location |
|
Fair Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging
instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
Other current liabilities |
|
$ |
2,644 |
|
|
Other current liabilities |
|
$ |
3,351 |
|
|
|
Other liabilities |
|
|
1,355 |
|
|
Other liabilities |
|
|
840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,999 |
|
|
|
|
|
|
$ |
4,191 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as
hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity options |
|
Other current liabilities |
|
$ |
118 |
|
|
Other current liabilities |
|
$ |
4,060 |
|
|
|
Other liabilities |
|
|
|
|
|
Other liabilities |
|
|
175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity futures |
|
Other current liabilities |
|
|
1,354 |
|
|
Other current liabilities |
|
|
784 |
|
|
|
Other liabilities |
|
|
208 |
|
|
Other liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,680 |
|
|
|
|
|
|
$ |
5,019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 27, 2010 and September 26, 2009, the Partnerships outstanding commodity-related
derivatives had a weighted average maturity of approximately 4 months and 7 months, respectively.
9
The effect of the Partnerships derivative instruments on the condensed consolidated statement of
operations for the three months ended March 27, 2010 and March 28, 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 27, 2010 |
|
|
Three months ended March 28, 2009 |
|
Derivatives in |
|
Amount of Gains |
|
|
Gains (Losses) Reclassified |
|
|
Amount of Gains |
|
|
Gains (Losses) Reclassified |
|
Cash Flow |
|
(Losses) Recognized |
|
|
from Accumulated OCI into |
|
|
(Losses) Recognized |
|
|
from Accumulated OCI into |
|
Hedging |
|
in OCI (Effective |
|
|
Income (Effective Portion) |
|
|
in OCI (Effective |
|
|
Income (Effective Portion) |
|
Relationships |
|
Portion) |
|
|
Location |
|
Amount |
|
|
Portion) |
|
|
Location |
|
Amount |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap |
|
$ |
(431 |
) |
|
Interest expense |
|
$ |
|
|
|
$ |
704 |
|
|
Interest expense |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(431 |
) |
|
|
|
|
|
$ |
|
|
|
$ |
704 |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of |
|
|
|
|
|
|
Amount of |
|
Derivatives Not |
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
Designated as |
|
Location of Gains |
|
Gains (Losses) |
|
|
Location of Gains |
|
Gains (Losses) |
|
Hedging |
|
(Losses) Recognized |
|
Recognized |
|
|
(Losses) Recognized |
|
Recognized |
|
Instruments |
|
in Income |
|
in Income |
|
|
in Income |
|
in Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options |
|
Cost of products sold |
|
$ |
(2,820 |
) |
|
Cost of products sold |
|
$ |
(4,380 |
) |
Futures |
|
Cost of products sold |
|
|
1,087 |
|
|
Cost of products sold |
|
|
(5,310 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(1,733 |
) |
|
|
|
|
|
$ |
(9,690 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended March 27, 2010 |
|
|
Six months ended March 28, 2009 |
|
Derivatives in |
|
Amount of Gains |
|
|
Gains (Losses) Reclassified |
|
|
Amount of Gains |
|
|
Gains (Losses) Reclassified |
|
Cash Flow |
|
(Losses) Recognized |
|
|
from Accumulated OCI into |
|
|
(Losses) Recognized |
|
|
from Accumulated OCI into |
|
Hedging |
|
in OCI (Effective |
|
|
Income (Effective Portion) |
|
|
in OCI (Effective |
|
|
Income (Effective Portion) |
|
Relationships |
|
Portion) |
|
|
Location |
|
Amount |
|
|
Portion) |
|
|
Location |
|
Amount |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap |
|
$ |
192 |
|
|
Interest expense |
|
$ |
|
|
|
$ |
(584 |
) |
|
Interest expense |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
192 |
|
|
|
|
|
|
$ |
|
|
|
$ |
(584 |
) |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of |
|
|
|
|
|
|
Amount of |
|
Derivatives Not |
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
Designated as |
|
Location of Gains |
|
|
Gains (Losses) |
|
|
Location of Gains |
|
|
Gains (Losses) |
|
Hedging |
|
(Losses) Recognized |
|
|
Recognized |
|
|
(Losses) Recognized |
|
|
Recognized |
|
Instruments |
|
in Income |
|
|
in Income |
|
|
in Income |
|
|
in Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options |
|
Cost of goods sold |
|
$ |
(1,279 |
) |
|
Cost of goods sold |
|
$ |
1,546 |
|
Futures |
|
Cost of goods sold |
|
|
(3,861 |
) |
|
Cost of goods sold |
|
|
3,770 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(5,140 |
) |
|
|
|
|
|
$ |
5,316 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank Debt and Senior Notes. The fair value of the Revolving Credit Facility (defined below)
approximates the carrying value since the interest rates are periodically adjusted to reflect
market conditions. Based upon quoted
market prices, the fair value of the Partnerships 7.375% senior notes was $254,375 as of March 27,
2010 and $248,125 for the Partnerships previously existing 6.875% senior notes as of September 26, 2009.
10
4. Inventories
Inventories are stated at the lower of cost or market. Cost is determined using a weighted
average method for propane, fuel oil and refined fuels and natural gas, and a standard cost basis
for appliances, which approximates average cost. Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
March 27, |
|
|
September 26, |
|
|
|
2010 |
|
|
2009 |
|
|
Propane, fuel oil and refined
fuels and natural gas |
|
$ |
64,579 |
|
|
$ |
67,512 |
|
Appliances and related parts |
|
|
1,805 |
|
|
|
2,646 |
|
|
|
|
|
|
|
|
|
|
$ |
66,384 |
|
|
$ |
70,158 |
|
|
|
|
|
|
|
|
5. Net Income Per Common Unit
Computations of basic income per Common Unit are performed by dividing net income by the weighted
average number of outstanding Common Units, and restricted units granted under the restricted unit
plans to retirement-eligible grantees. Computations of diluted income per Common Unit are
performed by dividing net income by the weighted average number of outstanding Common Units and
unvested restricted units granted under the restricted unit plans. In computing diluted net
income per Common Unit, weighted average units outstanding used to compute basic net income per
Common Unit were increased by 279,033 and 249,371 units for the three and six months ended March
27, 2010, respectively, and 255,947 and 215,213 for the three and six months ended March 28, 2009,
respectively, to reflect the potential dilutive effect of the unvested restricted units
outstanding using the treasury stock method.
6. Long-Term Borrowings
Long-term borrowings consist of the following:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
March 27, |
|
|
September 26, |
|
|
|
2010 |
|
|
2009 |
|
7.375% senior notes, due March 15, 2020, net of
unamortized discount of $2,155 and $-0-, respectively |
|
$ |
247,845 |
|
|
$ |
|
|
6.875% senior notes, due December 15, 2013, net of
unamortized discount of $-0- and $585, respectively |
|
|
|
|
|
|
249,415 |
|
Revolving credit facility, due June 25, 2013 |
|
|
100,000 |
|
|
|
100,000 |
|
|
|
|
|
|
|
|
|
|
$ |
347,845 |
|
|
$ |
349,415 |
|
|
|
|
|
|
|
|
On March 23, 2010, the Partnership and its wholly-owned subsidiary, Suburban Energy Finance
Corporation, completed a public offering of $250,000 in aggregate principal amount of 7.375% senior
notes due March 15, 2020 (the 2020 Senior Notes). The 2020 Senior Notes were issued at 99.136%
of the principal amount. The net proceeds from the issuance, along with cash on hand, were used to
repurchase the 6.875% senior notes due in 2013 (the 2013 Senior Notes) on March 23, 2010 through
a redemption and tender offer. In connection with the repurchase of the 2013 Senior Notes, the
Partnership recognized a loss on the extinguishment of debt of $9,473 in the second quarter of
fiscal 2010, consisting of $7,231 for the repurchase premium and related fees, as well as the
write-off of $2,242 in unamortized debt origination costs and unamortized discount.
The Partnerships obligations under the 2020 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 2020 Senior Notes are structurally subordinated to, which means they rank
effectively behind, any debt and other liabilities of the Operating Partnership. The 2020 Senior
Notes mature on March 15, 2020 and require semi-annual interest payments in March and September.
The Partnership is permitted to redeem some or all of the 2020 Senior Notes any time at redemption
prices specified in the indenture governing the 2020 Senior Notes. In addition, the 2020 Senior
Notes have a change of control provision that would require the Partnership to offer to repurchase
the notes at 101% of the principal amount repurchased, if a change of control as defined in the
indenture occurs and is followed by a rating decline (a decrease in the rating of the notes by
either Moodys Investors Service or Standard and Poors Rating group by one or more gradations)
within 90 days of the consummation of the change of control.
11
On June 26, 2009, the Operating Partnership executed a Credit Agreement (the Credit Agreement) to
provide a four-year $250,000 revolving credit facility (the Revolving Credit Facility). The
Credit Agreement replaced the Operating Partnerships previous credit facility, which provided for
a $108,000 term loan (the Term Loan) and a separate $175,000 working capital facility both of
which, as amended, were scheduled to mature in March 2010. Borrowings under the Revolving Credit
Facility may be used for general corporate purposes, including working capital, capital
expenditures and acquisitions until maturity on June 25, 2013. The Operating Partnership has the
right to prepay any borrowings under the Revolving Credit Facility, in whole or in part, without
penalty at any time prior to maturity. At closing, the Operating Partnership borrowed $100,000
under the Revolving Credit Facility and, along with cash on hand, repaid the $108,000 then
outstanding under the Term Loan and terminated the previous credit facility. In addition, the
Partnership has standby letters of credit issued under the Revolving Credit Facility in the
aggregate amount of $61,881 primarily in support of retention levels under its self-insurance
programs, which expire periodically through April 3, 2011. Therefore, as of March 27, 2010 the
Partnership had available borrowing capacity of $88,119 under the Revolving Credit Facility.
Borrowings under the Revolving Credit Facility bear interest at prevailing interest rates based
upon, at the Operating Partnerships option, LIBOR plus the applicable margin or the base rate,
defined as the higher of the Federal Funds Rate plus 1/2 of 1%, the agent banks prime rate, or LIBOR
plus 1%, plus in each case the applicable margin. The applicable margin is dependent upon the
Partnerships ratio of total debt to EBITDA on a consolidated basis, as defined in the Revolving
Credit Facility. As of March 27, 2010, the interest rate for the Revolving Credit Facility was
approximately 3.3%. The interest rate and the applicable margin will be reset at the end of each
calendar quarter.
The Partnership acts as a guarantor with respect to the obligations of the Operating Partnership
under the Credit Agreement pursuant to the terms and conditions set forth therein. The obligations
under the Credit Agreement are secured by liens on substantially all of the personal property of
the Partnership, the Operating Partnership and their subsidiaries, as well as mortgages on certain
real property.
In connection with the Revolving Credit Facility, the Operating Partnership amended its existing
interest rate swap agreement, which has a termination date of March 31, 2010, to reduce the
notional amount to $100,000 from $108,000. The Operating Partnership will pay a fixed interest rate
of 4.66% to the issuing lender on the notional principal amount outstanding, 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. On July 31, 2009 our Operating Partnership entered into a forward
starting interest rate swap agreement with a March 31, 2010 effective date, which is commensurate
with the maturity of the existing interest rate swap agreement, and termination date of June 25,
2013. Under the forward starting interest rate swap agreement, the Operating Partnership will pay
a fixed interest rate of 3.12% to the issuing lender on the notional principal amount outstanding,
effectively fixing the LIBOR portion of the interest rate at 3.12%. In return, the issuing lender
will pay to the Operating Partnership a floating rate, namely LIBOR, on the same notional principal
amount. The interest rate swaps have been designated as a cash flow hedge.
The Revolving Credit Facility and the 2020 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. The Revolving Credit Facility contains
certain financial covenants (a) requiring the Partnerships consolidated interest coverage ratio,
as defined, to be not less than 2.5 to 1.0 as of the end of any fiscal quarter; (b) prohibiting the
total consolidated leverage ratio, as defined, of the Partnership from being greater than 4.5 to
1.0 as of the end of any fiscal quarter; and (c) prohibiting the Operating Partnerships senior
secured consolidated leverage ratio, as defined, from being greater than 3.0 to 1.0 as of the end
of any fiscal quarter. Under the indenture governing the 2020 Senior Notes, the Partnership is
generally permitted to make cash distributions equal to available cash, as defined, as of the end
of the immediately preceding quarter, if no event of default exists or would exist upon making such
distributions, and the Partnerships consolidated fixed charge coverage ratio, as defined, is
greater than 1.75 to 1. The Partnership and the Operating Partnership were in compliance with all
covenants and terms of the 2020 Senior Notes and the Revolving Credit Facility as of March 27,
2010.
12
Debt origination costs representing the costs incurred in connection with the placement of, and
the subsequent amendment to, long-term borrowings are capitalized within other assets and
amortized on a straight-line basis over the term of the respective debt agreements. Other assets
at March 27, 2010 and September 26, 2009 include debt origination costs with a net carrying amount
of $10,132 and $7,136, respectively. In connection with the repurchase of the 2013 Senior Notes,
$1,722 and $1,385 of debt origination costs were written-off in the second quarter of fiscal 2010
and the fourth quarter of fiscal 2009, respectively.
The aggregate amounts of long-term debt maturities subsequent to March 27, 2010 are as follows:
2010 through 2012: $-0-; 2013: $100,000; 2014: $-0-; and thereafter: $250,000.
7. Distributions of Available Cash
The Partnership makes distributions to its partners no later than 45 days after the end of each
fiscal quarter of the Partnership in an aggregate amount equal to its Available Cash for such
quarter. Available Cash, as defined in the Partnership Agreement, generally means all cash on hand
at the end of the respective fiscal quarter less the amount of cash reserves established by the
Board of Supervisors in its reasonable discretion for future cash requirements. These reserves are
retained for the proper conduct of the Partnerships business, the payment of debt principal and
interest and for distributions during the next four quarters.
On April 22, 2010, the Board of Supervisors declared a quarterly distribution of $0.84 per Common
Unit, or $3.36 per Common Unit on an annualized basis, in respect of the second quarter of fiscal
2010, payable on May 11, 2010 to holders of record on May 4, 2010. The annualized distribution
represents an increase of $0.02 per Common Unit from the previous distribution rate, and a growth
rate of 3.1% compared to the second quarter of fiscal 2009.
8. Unit-Based Compensation Arrangements
The Partnership recognizes compensation cost over the respective service period for employee
services received in exchange for an award of equity or equity-based compensation based on the
grant date fair value of the award. The Partnership measures liability awards under an
equity-based payment arrangement based on remeasurement of the awards fair value at the conclusion
of each interim and annual reporting period until the date of settlement, taking into consideration
the probability that the performance conditions will be satisfied.
Restricted Unit Plans. In fiscal 2000 and fiscal 2009, the Partnership adopted the Suburban
Propane Partners, L.P. 2000 Restricted Unit Plan and 2009 Restricted Unit Plan (collectively, the
Restricted Unit Plans), respectively, which authorize the issuance of Common Units to executives,
managers and other employees and members of the Board of Supervisors of the Partnership. The total
number of Common Units authorized for issuance under the Restricted Unit Plans is 1,917,805.
Unless otherwise stipulated by the Compensation Committee of the Board of Supervisors on or before
the grant date, restricted units issued under the Restricted Unit Plans vest over time with 25% of
the Common Units vesting on the third and fourth anniversaries of the grant date and the remaining
50% of the Common Units vesting on the fifth anniversary of the grant date. The Restricted Unit
Plans participants are not eligible to receive quarterly distributions or vote their respective
restricted units until vested. Because each restricted unit represents a promise to issue a Common
Unit at a future date, restricted units cannot be sold or transferred prior to vesting. The fair
value of the restricted unit is established by the market price of the Common Unit on the date of
grant, net of estimated future distributions during the vesting period. Restricted units are
subject to forfeiture in certain circumstances as defined in the Restricted Unit Plans.
Compensation expense for the unvested awards is recognized ratably over the vesting periods and is
net of estimated forfeitures.
13
During the six months ended March 27, 2010, the Partnership awarded 142,771 restricted units under
the Restricted Unit Plans at an aggregate grant date fair value of $4,529. The following is a
summary of activity for the Restricted Unit Plans for the six months ended March 27, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average Grant |
|
|
|
|
|
|
|
Date Fair Value |
|
|
|
Units |
|
|
Per Unit |
|
Outstanding September 26, 2009 |
|
|
415,295 |
|
|
$ |
28.89 |
|
Awarded |
|
|
142,771 |
|
|
|
31.72 |
|
Forfeited |
|
|
(1,975 |
) |
|
|
(30.40 |
) |
Issued |
|
|
(62,380 |
) |
|
|
(27.18 |
) |
|
|
|
|
|
|
|
|
Outstanding March 27, 2010 |
|
|
493,711 |
|
|
$ |
29.92 |
|
|
|
|
|
|
|
|
|
As of March 27, 2010, unrecognized compensation cost related to unvested restricted units awarded
under the Restricted Unit Plans amounted to $7,001. Compensation cost associated with unvested
awards is expected to be recognized over a weighted-average period of 1.8 years. Compensation
expense recognized under the Restricted Unit Plans, net of forfeitures, for the three and six
months ended March 27, 2010 was $1,025 and $2,017, respectively, and $673 and $1,241 for the three
and six months ended March 28, 2009, respectively.
Long-Term Incentive Plan. The Partnership has a non-qualified, unfunded long-term incentive plan
for officers and key employees (the LTIP) which provides for payment, in the form of cash, of an
award of equity-based compensation at the end of a three-year performance period. The level of
compensation earned under the LTIP is based on the market performance of the Partnerships Common
Units on the basis of total return to Unitholders (TRU) compared to the TRU of a predetermined
peer group consisting solely of other master limited partnerships, approved by the Compensation
Committee of the Board of Supervisors, over the same three-year performance period. As a result of
the quarterly remeasurement of the liability for awards under the LTIP, compensation expense for
the three and six months ended March 27, 2010 was $584 and $1,619, respectively, and $1,551 and
$1,952 for the three and six months ended March 28, 2009, respectively. As of March 27, 2010 and
September 26, 2009, the Partnership had a liability included within accrued employment and benefit
costs (or other liabilities, as applicable) of $4,820 and $6,558, respectively, related to
estimated future payments under the LTIP.
9. Commitments and Contingencies
Self-Insurance. The Partnership is self-insured for general and product, workers compensation and
automobile liabilities up to predetermined thresholds above which third party insurance applies. As
of March 27, 2010 and
September 26, 2009, the Partnership had accrued insurance liabilities of $56,234 and $52,248,
respectively, representing the total estimated losses under these self-insurance programs. The
Partnership is also involved in various legal actions that have arisen in the normal course of
business, including those relating to commercial transactions and product liability. Management
believes, based on the advice of legal counsel, that the ultimate resolution of these matters will
not have a material adverse effect on the Partnerships financial position or future results of
operations, after considering its self-insurance reserves for known and unasserted claims, as well
as existing insurance policies in force. For the portion of the estimated self-insurance liability
that exceeds insurance deductibles, the Partnership records an asset within other assets (or other
current assets, as applicable) related to the amount of the liability expected to be covered by
insurance which amounted to $18,226 and $14,812 as of March 27, 2010 and September 26, 2009,
respectively.
10. 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 2017. 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, was $9,396 as of March 27,
2010. The fair value of residual value guarantees for outstanding operating leases was de minimis
as of March 27, 2010 and September 26, 2009.
14
11. Pension Plans and Other Postretirement Benefits
The following table provides the components of net periodic benefit costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
March 27, |
|
|
March 28, |
|
|
March 27, |
|
|
March 28, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost |
|
$ |
1,876 |
|
|
$ |
2,372 |
|
|
$ |
3,752 |
|
|
$ |
4,744 |
|
Expected return on plan assets |
|
|
(2,020 |
) |
|
|
(2,301 |
) |
|
|
(4,040 |
) |
|
|
(4,602 |
) |
Recognized net actuarial loss |
|
|
1,343 |
|
|
|
1,012 |
|
|
|
2,686 |
|
|
|
2,024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
1,199 |
|
|
$ |
1,083 |
|
|
$ |
2,398 |
|
|
$ |
2,166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement Benefits |
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
March 27, |
|
|
March 28, |
|
|
March 27, |
|
|
March 28, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service Cost |
|
$ |
2 |
|
|
$ |
1 |
|
|
$ |
4 |
|
|
$ |
2 |
|
Interest cost |
|
|
253 |
|
|
|
345 |
|
|
|
506 |
|
|
|
690 |
|
Amortization of prior
service costs |
|
|
(123 |
) |
|
|
(122 |
) |
|
|
(245 |
) |
|
|
(244 |
) |
Recognized net actuarial loss |
|
|
(16 |
) |
|
|
(78 |
) |
|
|
(32 |
) |
|
|
(156 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
116 |
|
|
$ |
146 |
|
|
$ |
233 |
|
|
$ |
292 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There are no projected minimum employer contribution requirements under ERISA laws for fiscal 2010
under our defined benefit pension plan. The projected annual contribution requirements related to
the Partnerships postretirement health care and life insurance benefit plan for fiscal 2010 is
$1,748, of which $696 has been contributed during the six months ended March 27, 2010.
12. Income Taxes
For federal income tax purposes, as well as for state income tax purposes in the majority of the
states in which the Partnership operates, the earnings attributable to the Partnership, as a
separate legal entity, and the Operating Partnership are not subject to income tax at the
Partnership level. Rather, the taxable income or loss attributable to the Partnership, as a
separate legal entity, and to the Operating Partnership, which may vary substantially from the
income before income taxes, reported by the Partnership in the condensed consolidated statement of
operations, are includable in the federal and state income tax returns of the individual partners.
The aggregate difference in the basis of the Partnerships net assets for financial and tax
reporting purposes cannot be readily determined as the Partnership does not have access to
information regarding each partners basis in the Partnership.
The Partnerships fuel oil and refined fuels, natural gas and electricity, and service businesses
are conducted through corporate subsidiaries and, as such, are subject to corporate level federal
and state income taxes. However, because the Corporate Entity has experienced operating losses in
recent years, a full valuation allowance has been provided against the deferred tax assets. The
conclusion that a full valuation allowance is necessary was based upon an analysis of all available
evidence, both negative and positive at the balance sheet date, which, taken as a whole, indicates
that it is more likely than not that sufficient future taxable income will not be available to
utilize the deferred tax assets of the Corporate Entity. Managements periodic reviews include,
among other things, the nature and amount of the taxable income and expense items, the expected
timing when assets will be used or liabilities will be required to be reported and the reliability
of historical profitability of businesses expected to provide future earnings. Furthermore,
management considered tax-planning strategies it could use to increase the likelihood that the
deferred tax assets will be realized.
15
In fiscal 2010, the Partnership adopted new accounting guidance concerning business combinations.
Certain provisions of the guidance, in particular a provision related to the accounting for
acquired tax benefits, are required to be applied regardless of when the business combination
occurred. Therefore, to the extent the Partnerships Corporate Entity generates taxable profits
that enable the utilization of tax benefits acquired in prior business combinations, the
corresponding reduction in the valuation allowance will be recorded as a reduction in the provision
for income taxes. Previously, such valuation allowance reductions were recorded as a reduction to
goodwill. At the beginning of fiscal 2010, the Partnership had a full valuation allowance of
$45,462 against the net deferred tax assets. Of the total valuation allowance, $15,057 was
established through purchase accounting for acquired tax benefits.
13. Segment Information
The Partnership manages and evaluates its operations in five operating segments, three of which are
reportable segments: Propane, Fuel Oil and Refined Fuels and Natural Gas and Electricity. The
chief operating decision maker evaluates performance of the operating segments using a number of
performance measures, including gross margins and income before interest expense and provision for
income taxes (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 within the condensed consolidated statements of
operations. In addition, certain costs associated with field operations support that are reported
in operating expenses within the condensed 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
otherwise the same as those described in the summary of significant accounting policies Note in the
Partnerships Annual Report on Form 10-K for the fiscal year ended September 26, 2009.
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 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 Partnerships suppliers to the customer.
Activities in the all other category include the Partnerships service business, which is
primarily engaged in the sale, installation and servicing of a wide variety of home comfort
equipment, particularly in the areas of heating and ventilation, and activities from the
Partnerships HomeTown Hearth & Grill and Suburban Franchising subsidiaries.
16
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
March 27, |
|
|
March 28, |
|
|
March 27, |
|
|
March 28, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Propane |
|
$ |
369,341 |
|
|
$ |
336,913 |
|
|
$ |
602,872 |
|
|
$ |
610,821 |
|
Fuel oil and refined fuels |
|
|
61,311 |
|
|
|
65,138 |
|
|
|
100,558 |
|
|
|
119,329 |
|
Natural gas and electricity |
|
|
28,841 |
|
|
|
32,093 |
|
|
|
45,703 |
|
|
|
54,374 |
|
All other |
|
|
9,670 |
|
|
|
11,081 |
|
|
|
21,462 |
|
|
|
24,016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
469,163 |
|
|
$ |
445,225 |
|
|
$ |
770,595 |
|
|
$ |
808,540 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before loss on debt extinguishment, interest expense and income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Propane |
|
$ |
124,780 |
|
|
$ |
129,492 |
|
|
$ |
198,678 |
|
|
$ |
227,161 |
|
Fuel oil and refined fuels |
|
|
14,694 |
|
|
|
15,383 |
|
|
|
14,844 |
|
|
|
23,859 |
|
Natural gas and electricity |
|
|
4,674 |
|
|
|
5,852 |
|
|
|
7,219 |
|
|
|
9,022 |
|
All other |
|
|
(4,139 |
) |
|
|
(3,808 |
) |
|
|
(8,213 |
) |
|
|
(6,752 |
) |
Corporate |
|
|
(25,212 |
) |
|
|
(21,725 |
) |
|
|
(41,974 |
) |
|
|
(37,867 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income before loss on debt extinguishment, interest expense
and income taxes |
|
|
114,797 |
|
|
|
125,194 |
|
|
|
170,554 |
|
|
|
215,423 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to income from continuing operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on debt extinguishment |
|
|
9,473 |
|
|
|
|
|
|
|
9,473 |
|
|
|
|
|
Interest expense, net |
|
|
6,608 |
|
|
|
9,442 |
|
|
|
13,791 |
|
|
|
18,845 |
|
Provision for income taxes |
|
|
328 |
|
|
|
886 |
|
|
|
527 |
|
|
|
1,024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
98,388 |
|
|
$ |
114,866 |
|
|
$ |
146,763 |
|
|
$ |
195,554 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Propane |
|
$ |
3,711 |
|
|
$ |
3,822 |
|
|
$ |
7,361 |
|
|
$ |
7,632 |
|
Fuel oil and refined fuels |
|
|
778 |
|
|
|
825 |
|
|
|
1,544 |
|
|
|
1,640 |
|
Natural gas and electricity |
|
|
253 |
|
|
|
252 |
|
|
|
506 |
|
|
|
504 |
|
All other |
|
|
42 |
|
|
|
92 |
|
|
|
125 |
|
|
|
185 |
|
Corporate |
|
|
2,358 |
|
|
|
2,140 |
|
|
|
4,690 |
|
|
|
4,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization |
|
$ |
7,142 |
|
|
$ |
7,131 |
|
|
$ |
14,226 |
|
|
$ |
14,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
March 27, |
|
|
September 26, |
|
|
|
2010 |
|
|
2009 |
|
Assets: |
|
|
|
|
|
|
|
|
Propane |
|
$ |
750,947 |
|
|
$ |
681,809 |
|
Fuel oil and refined fuels |
|
|
73,025 |
|
|
|
83,416 |
|
Natural gas and electricity |
|
|
22,968 |
|
|
|
17,540 |
|
All other |
|
|
3,656 |
|
|
|
2,876 |
|
Corporate |
|
|
267,597 |
|
|
|
279,854 |
|
Eliminations |
|
|
(87,981 |
) |
|
|
(87,981 |
) |
|
|
|
|
|
|
|
Total assets |
|
$ |
1,030,212 |
|
|
$ |
977,514 |
|
|
|
|
|
|
|
|
14. Recently Issued Accounting Pronouncements
In December 2008, the Financial
Accounting Standards Board issued new financial reporting
guidance to require more detailed disclosures about employers pension plan assets. These new
disclosures will include more information on investment strategies, major categories of plan
assets, concentrations of risk within plan assets and valuation techniques used to measure the fair
value of plan assets. The new guidance is effective for fiscal years ending after December 15,
2009, which is the Partnerships 2010 fiscal year ending September 25, 2010. Since it only
addresses disclosures, the adoption of the new guidance is not expected to have an impact on the
Partnerships consolidated financial position, results of operations or cash flows.
15. Subsequent Events
The Partnership has evaluated all subsequent events that occurred after the balance sheet date
through the date its financial statements were issued, and concluded there were no events or
transactions occurring during this period that required recognition or disclosure in its financial
statements.
17
|
|
|
ITEM 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS |
The following is a discussion of the financial condition and results of operations of the
Partnership as of and for the three and six months ended March 27, 2010. The discussion should be
read in conjunction with Managements Discussion and Analysis of Financial Condition and Results of
Operations and the historical consolidated financial statements and notes thereto included in the
Annual Report on Form 10-K for the fiscal year ended September 26, 2009.
Executive Overview
The following are factors that regularly affect our operating results and financial condition.
In addition, our business is subject to the risks and uncertainties described in Item 1A included
in the Annual Report on Form 10-K for the fiscal year ended September 26, 2009.
Product Costs and Supply
The level of profitability in the retail propane, fuel oil, natural gas and electricity
businesses is largely dependent on the difference between retail sales price and product cost. The
unit cost of our products, particularly propane, fuel oil and natural gas, is subject to volatility
as a result of product supply or other market conditions, including, but not limited to, economic
and political factors impacting crude oil and natural gas supply or pricing. We enter into product
supply contracts that are generally one-year agreements subject to annual renewal, and also
purchase product on the open market. We attempt to reduce price risk by pricing product on a
short-term basis. Our propane supply contracts typically provide for pricing based upon index
formulas using the posted prices established at major supply points such as Mont Belvieu, Texas, or
Conway, Kansas (plus transportation costs) at the time of delivery.
To supplement our annual purchase requirements, we may utilize forward fixed price purchase
contracts to acquire a portion of the propane that we resell to our customers, which allows us to
manage our exposure to unfavorable changes in commodity prices and to assure adequate physical
supply. The percentage of contract purchases, and the amount of supply contracted for under
forward contracts at fixed prices, will vary from year to year based on market conditions.
Product cost changes can occur rapidly over a short period of time and can impact
profitability. There is no assurance that we will be able to pass on product cost increases fully
or immediately, particularly when product costs increase rapidly. Therefore, average retail sales
prices can vary significantly from year to year as product costs fluctuate with propane, fuel oil,
crude oil and natural gas commodity market conditions. In addition, in periods of sustained higher
commodity prices, retail sales volumes can be negatively impacted by customer conservation efforts.
Seasonality
The retail propane and fuel oil distribution businesses, as well as the natural gas marketing
business, are seasonal because these fuels are primarily used for heating in residential and
commercial buildings. Historically, approximately two-thirds of our retail propane volume is sold
during the six-month peak heating season from October through March. The fuel oil business tends to
experience greater seasonality given its more limited use for space heating and approximately
three-fourths of our fuel oil volumes are sold between October and March. Consequently, sales and
operating profits are concentrated in our first and second fiscal quarters. Cash flows from
operations, therefore, are greatest during the second and third fiscal quarters when customers pay
for product purchased during the winter heating season. We expect lower operating profits and
either net losses or lower net income during the period from April through September (our third and
fourth fiscal quarters). To the extent necessary, we will reserve cash from the second and third
quarters for distribution to holders of our Common Units in the fourth quarter and following fiscal
year first quarter.
18
Weather
Weather conditions have a significant impact on the demand for our products, in particular
propane, fuel oil and natural gas, for both heating and agricultural purposes. Many of our
customers rely heavily on propane, fuel oil or natural gas as a heating source. Accordingly, the
volume sold is directly affected by the severity of the winter weather in our service areas, which
can vary substantially from year to year. In any given area, sustained warmer than normal
temperatures will tend to result in reduced propane, fuel oil and natural gas consumption, while
sustained colder than normal temperatures will tend to result in greater consumption.
Hedging and Risk Management Activities
We engage in hedging and risk management activities to reduce the effect of price volatility
on our product costs and to ensure the availability of product during periods of short supply. We
enter into propane forward and option agreements with third parties, and use fuel oil and crude oil
futures and option contracts traded on the New York Mercantile Exchange (NYMEX), to purchase and
sell propane, fuel oil and crude oil at fixed prices in the future. The majority of the futures,
forward and option agreements are used to hedge price risk associated with propane and fuel oil
physical inventory, as well as, in certain instances, forecasted purchases of propane or fuel oil.
Forward contracts are generally settled physically at the expiration of the contract and futures
are generally settled in cash at the expiration of the contract. Although we use derivative
instruments to reduce the effect of price volatility
associated with priced physical inventory and forecasted transactions, we do not use
derivative instruments for speculative trading purposes. Risk management activities are monitored
by an internal Commodity Risk Management Committee, made up of five members of management and
reporting to our Audit Committee, through enforcement of our Hedging and Risk Management Policy.
Critical Accounting Policies and Estimates
Our significant accounting policies are summarized in Note 2, Summary of Significant
Accounting Policies, included within the Notes to Consolidated Financial Statements section of our
Annual Report on Form 10-K for the fiscal year ended September 26, 2009.
Certain amounts included in or affecting our consolidated financial statements and related
disclosures must be estimated, requiring management to make certain assumptions with respect to
values or conditions that cannot be known with certainty at the time the financial statements are
prepared. The preparation of financial statements in conformity with generally accepted accounting
principles (GAAP) requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses during the reporting
period. We are also subject to risks and uncertainties that may cause actual results to differ from
estimated results. Estimates are used when accounting for depreciation and amortization of
long-lived assets, employee benefit plans, self-insurance and litigation reserves, allowances for
doubtful accounts, asset valuation assessments and valuation of derivative instruments. We base
our estimates on historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from other sources.
Any effects on our business, financial position or results of operations resulting from revisions
to these estimates are recorded in the period in which the facts that give rise to the revision
become known to us. Management has reviewed these critical accounting estimates and related
disclosures with the Audit Committee of our Board of Supervisors.
19
Results of Operations and Financial Condition
Net income for the second quarter of fiscal 2010 amounted to $98.4 million, or $2.78 per
Common Unit, compared to $114.9 million, or $3.50 per Common Unit, in the prior year quarter.
Earnings before interest, taxes, depreciation and amortization (EBITDA) for the second quarter of
fiscal 2010 amounted to $112.5 million, compared to $132.3 million in the prior year second
quarter.
Net income and EBITDA for the second quarter of fiscal 2010 included a loss on debt
extinguishment of $9.5 million associated with the senior debt refinancing completed during March
2010. Therefore, excluding the effect of the loss on debt extinguishment on fiscal 2010 second
quarter earnings and mark-to-market adjustment for derivative instruments used in risk management
activities, Adjusted EBITDA amounted to $123.7 million, compared to Adjusted EBITDA of $142.0
million in the prior year second quarter. The second quarter of fiscal 2010 was characterized by
continued adverse affects of the weak economy, an erratic weather pattern and a volatile commodity
price environment. The prior year second quarter benefitted from a sharp drop in commodity prices
which, as reported throughout the prior year, resulted in higher gross margins.
Retail propane gallons sold in the second quarter of fiscal 2010 decreased 10.0 million
gallons, or 7.5%, to 124.5 million gallons compared to 134.5 million gallons in the prior year
second quarter. Sales of fuel oil and other refined fuels decreased 5.7 million gallons, or 23.7%,
to 18.4 million gallons during the second quarter of fiscal 2010 compared to 24.1 million gallons
in the prior year second quarter. The weak economy continues to negatively affect sales volumes,
particularly in our non-residential customer base, which accounted for 63% of the overall decline
in propane sales volumes. Additionally, while average temperatures across our service territories
for the second quarter of fiscal 2010 were 3% warmer than both normal and the prior year second
quarter, average temperatures in our
northeast and western territories were approximately 6% warmer than both normal and the prior
year second quarter, which also contributed to the decline in sales volumes.
Revenues of $469.2 million for the second quarter of fiscal 2010 increased $24.0 million, or
5.4%, compared to the prior year second quarter, primarily due to higher average selling prices in
line with higher average product costs, offset to an extent by the lower volumes sold. Average
posted prices for propane and fuel oil were 84.4% and 52.3% higher, respectively, compared to the
prior year second quarter. Cost of products sold for the second quarter of fiscal 2010 of $248.5
million increased $40.2 million, or 19.3%, compared to $208.3 million in the prior year second
quarter. Cost of products sold in the second quarter of fiscal 2010 included a $1.7 million
unrealized (non-cash) loss attributable to the mark-to-market adjustment for derivative instruments
used in risk management activities, compared to a $9.7 million unrealized (non-cash) loss in the
prior year quarter; these unrealized losses are excluded from Adjusted EBITDA for both periods in
the table below.
Combined operating and general and administrative expenses of $98.8 million for the second
quarter of fiscal 2010 were $5.8 million, or 5.5%, lower than the prior year second quarter,
primarily due to lower variable compensation attributable to lower earnings and continued savings
in vehicle expenses and insurance costs. Net interest expense decreased $2.8 million, or 29.8%, as
a result of lower outstanding debt during the second quarter of fiscal 2010 compared to the prior
year second quarter due to the $183.0 million debt reduction in the second half of fiscal 2009.
Additionally, during the second quarter of fiscal 2010, we took proactive steps to further enhance
our capital structure by extending the maturity on $250.0 million of senior debt until March 2020.
On March 23, 2010, we announced the successful completion of the issuance of $250.0
million of 7.375% senior notes maturing in March 2020 to replace the previously existing 6.875%
senior notes that were set to mature in December 2013. Once again, we funded all working capital
requirements with cash on hand without the need to borrow under our working capital facility and
ended the second quarter of fiscal 2010 with more than $140.0 million of cash.
On April 22, 2010, we announced that our Board of Supervisors had declared the twenty-fifth
increase (since our recapitalization in 1999) in our quarterly distribution from $0.835 to $0.84
per Common Unit for the three months ended March 27, 2010. On an annualized basis, this increased
distribution rate equates to $3.36 per Common Unit, an increase of $0.02 per Common Unit from the
previous distribution rate, and an increase of 3.1% compared to the second quarter of fiscal 2009.
The $0.84 per Common Unit distribution will be paid on May 11, 2010 to Common Unitholders of record
as of May 4, 2010.
20
Looking ahead to the remainder of fiscal 2010, we expect that the economy and volatile
commodity price environment will continue to present challenges in each of our markets that will
continue to affect customer buying habits, thus having a possible negative impact on sales volumes.
Nonetheless, we believe that our flexible cost structure, focus on operating efficiencies and
financial strength are all factors that will help us effectively manage through the challenging
operating environment.
Our anticipated cash requirements for the remainder of fiscal 2010 include: (i) maintenance
and growth capital expenditures of approximately $15.5 million; (ii) interest payments of
approximately $13.0 million; and (iii) cash distributions of approximately $59.3 million to our
Common Unitholders based on the most recently increased quarterly distribution rate of $0.84 per
Common Unit. Based on our current estimates of cash flow from operations and our cash position at
the end of the second quarter of fiscal 2010, we do not anticipate the need to borrow under our
credit facility to meet our working capital requirements for the remainder of fiscal 2010. As of
March 27, 2010, there was unused borrowing capacity under the Revolving Credit Facility of $88.1
million after considering outstanding letters of credit of $61.9 million.
Three Months Ended March 27, 2010 Compared to Three Months Ended March 28, 2009
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
Percent |
|
|
|
March 27, |
|
|
March 28, |
|
|
Increase/ |
|
|
Increase/ |
|
(Dollars in thousands) |
|
2010 |
|
|
2009 |
|
|
(Decrease) |
|
|
(Decrease) |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Propane |
|
$ |
369,341 |
|
|
$ |
336,913 |
|
|
$ |
32,428 |
|
|
|
9.6 |
% |
Fuel oil and refined fuels |
|
|
61,311 |
|
|
|
65,138 |
|
|
|
(3,827 |
) |
|
|
(5.9 |
%) |
Natural gas and electricity |
|
|
28,841 |
|
|
|
32,093 |
|
|
|
(3,252 |
) |
|
|
(10.1 |
%) |
All other |
|
|
9,670 |
|
|
|
11,081 |
|
|
|
(1,411 |
) |
|
|
(12.7 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
469,163 |
|
|
$ |
445,225 |
|
|
$ |
23,938 |
|
|
|
5.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues increased $23.9 million, or 5.4%, to $469.2 million for the three months ended
March 27, 2010 compared to $445.2 million for the three months ended March 28, 2009 as higher
average selling prices associated with higher product costs were partially offset by lower volumes.
Volumes were lower than the prior year second quarter due to the impact of continued adverse
economic conditions, particularly on our commercial and industrial accounts, as well as ongoing
customer conservation efforts and the unfavorable impact of warmer temperatures. Average
temperatures across our service territories for the second quarter of fiscal 2010 were 3% warmer
than both normal and the prior year second quarter. However, average temperatures in our
northeastern and western territories, which are areas where we have a higher concentration of
residential customers, were approximately 6% warmer than both normal and the prior year second
quarter.
Revenues from the distribution of propane and related activities of $369.3 million in the
second quarter of fiscal 2010 increased $32.4 million, or 9.6%, compared to $336.9 million in the
prior year second quarter, primarily due to higher average selling prices, partially offset by
lower volumes, particularly in our commercial and industrial accounts. Average propane selling
prices in the second quarter of fiscal 2010 increased 16.5% compared to the prior year second
quarter due to higher product costs, thereby having a positive impact on revenues. Retail propane
gallons sold in the second quarter of fiscal 2010 decreased 10.0 million gallons, or 7.5%, to 124.5
million gallons from 134.5 million gallons in the prior year second quarter. The volume decline
was primarily attributable to lower commercial and industrial volumes resulting from adverse
economic conditions, unfavorable weather and, to a lesser extent, continued customer conservation.
Lower volumes sold in the non-residential customer base accounted for approximately 63% of the
decline in propane sales volume. Additionally, included within the propane segment are revenues
from wholesale and other propane activities of $15.2 million in the second quarter of fiscal 2010,
which increased $6.9 million compared to the prior year second quarter.
21
Revenues from the distribution of fuel oil and refined fuels of $61.3 million in the second
quarter of fiscal 2010 decreased $3.8 million, or 5.9%, from $65.1 million in the prior year second
quarter, primarily due to lower
volumes, partially offset by higher average selling prices. Fuel oil and refined fuels gallons
sold in the second quarter of fiscal 2010 decreased 5.7 million gallons, or 23.7%, to 18.4 million
gallons from 24.1 million gallons in the prior year second quarter. Lower volumes in our fuel oil
and refined fuels segment were attributable to warmer average temperatures in our northeast
territories, as well as the impact of ongoing customer conservation driven by adverse economic
conditions. As mentioned above, average temperatures in the northeast were 6% warmer than both
normal and the prior year second quarter and, in particular, average temperatures in the month of
March 2010 were approximately 17% warmer than both normal and the comparable period in the prior
year. Average selling prices in our fuel oil and refined fuels segment in the second quarter of
fiscal 2010 increased 22.9% compared to the prior year second quarter due to higher product costs,
thereby having a positive impact on revenues.
Revenues in our natural gas and electricity segment decreased $3.3 million, or 10.1%, to $28.8
million in the second quarter of fiscal 2010 compared to $32.1 million in the prior year second
quarter primarily as a result of lower natural gas average selling prices. Revenues in our all
other segment decreased 12.7% to $9.7 million in the second quarter of fiscal 2010 from $11.1
million in the prior year second quarter primarily due to reduced installation activities as a
result of the market decline in residential and commercial construction and other adverse economic
conditions.
Cost of Products Sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
Percent |
|
|
|
March 27, |
|
|
March 28, |
|
|
Increase |
|
|
Increase |
|
(Dollars in thousands) |
|
2010 |
|
|
2009 |
|
|
(Decrease) |
|
|
(Decrease) |
|
Cost of products sold |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Propane |
|
$ |
186,709 |
|
|
$ |
141,201 |
|
|
$ |
45,508 |
|
|
|
32.2 |
% |
Fuel oil and refined fuels |
|
|
37,284 |
|
|
|
39,912 |
|
|
|
(2,628 |
) |
|
|
(6.6 |
%) |
Natural gas and electricity |
|
|
21,721 |
|
|
|
24,165 |
|
|
|
(2,444 |
) |
|
|
(10.1 |
%) |
All other |
|
|
2,745 |
|
|
|
2,981 |
|
|
|
(236 |
) |
|
|
(7.9 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of products sold |
|
$ |
248,459 |
|
|
$ |
208,259 |
|
|
$ |
40,200 |
|
|
|
19.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percent of total revenues |
|
|
53.0 |
% |
|
|
46.8 |
% |
|
|
|
|
|
|
|
|
Given the retail nature of our operations, we maintain a certain level of priced physical
inventory to ensure our field operations have adequate supply commensurate with the time of year.
Our strategy has been, and will continue to be, to keep our physical inventory priced relatively
close to market for our field operations. Consistent with past practices, we principally utilize
futures and/or option contracts traded on the NYMEX to mitigate the price risk associated with our
priced physical inventory. Under this risk management strategy, realized gains or losses on
futures or option contracts, which are reported in cost of products sold, will typically offset
losses or gains on the physical inventory once the product is sold. We do not use futures or
option contracts, or other derivative instruments, for speculative trading purposes.
The cost of products sold reported in the condensed consolidated statements of operations
represents the weighted average unit cost of propane and fuel oil sold, including transportation
costs to deliver product from our supply points to storage or to our customer service centers.
Cost of products sold also includes the cost of natural gas and electricity, as well as the cost of
appliances and related parts sold or installed by our customer service centers computed on a basis
that approximates the average cost of the products. Unrealized (non-cash) gains or losses from
changes in the fair value of derivative instruments that are not designated as cash flow hedges are
recorded in each quarterly reporting period within cost of products sold. Cost of products sold is
reported exclusive of any depreciation and amortization; these amounts are reported separately
within the condensed consolidated statements of operations.
22
Average posted prices for propane and fuel oil in the second quarter of fiscal 2010 were 84.4%
and 52.3% higher, respectively, compared to the prior year second quarter. Cost of products sold
increased $40.2 million, or 19.3%, to $248.5 million in the second quarter of fiscal 2010 compared
to $208.3 million in the prior year second quarter due to higher average product costs associated
with the increase in commodity prices, partially offset by lower volumes sold and the favorable
impact of non-cash mark-to-market adjustments from our risk management activities in the second
quarter of fiscal 2010 compared to the prior year second quarter. Cost of products sold in the
second quarter of fiscal 2010 included a $1.7 million unrealized (non-cash) loss representing the
net change in the fair value of derivative instruments during the period, compared to a $9.7
million unrealized (non-cash) loss in the prior year second quarter, resulting in a decrease of
$8.0 million in cost of products sold in the second quarter of fiscal 2010 compared to the prior
year second quarter ($6.7 million decrease reported within the propane segment and $1.3 million
decrease reported within the fuel oil and refined fuels segment).
Cost of products sold associated with the distribution of propane and related activities of
$186.7 million in the second quarter of fiscal 2010 increased $45.5 million, or 32.2%, compared to
the prior year second quarter. Higher average propane costs resulted in an increase of $56.2
million in cost of products sold during the second quarter of fiscal 2010 compared to the prior
year second quarter. The impact of the sharp increase in commodity prices was partially offset by
lower propane volumes which resulted in a $10.2 million decrease in cost of products sold during
the second quarter of fiscal 2010 compared to the prior year second quarter. Cost of products sold
from wholesale and other propane activities increased $6.2 million in the second quarter of fiscal
2010 compared to the prior year second quarter.
Cost of products sold associated with our fuel oil and refined fuels segment of $37.3 million
in the second quarter of fiscal 2010 decreased $2.6 million, or 6.6%, compared to the prior year
second quarter. Lower fuel oil volumes resulted in a decrease of $9.1 million in cost of products
sold, substantially offset by the impact of the increase in commodity prices, which resulted in a
$7.8 million increase in cost of products sold during the second quarter of fiscal 2010 compared to
the prior year second quarter.
Cost of products sold in our natural gas and electricity segment of $21.7 million in the
second quarter of fiscal 2010 decreased $2.4 million, or 10.1%, compared to the prior year second
quarter primarily due to lower natural gas costs. Cost of products sold in our all other segment
of $2.7 million was relatively flat compared to the prior year second quarter.
For the second quarter of fiscal 2010, total cost of products sold as a percent of total
revenues increased 6.2 percentage points to 53.0% from 46.8% in the prior year second quarter. The
increase in cost of products sold as a percentage of revenues was primarily attributable to the
favorable margins reported in the prior year second quarter that were attributable to the declining
commodity price environment during that period, which situation was not repeated in the current
year second quarter due to the rising commodity price environment in the current year. The
declining commodity price environment in the first half of the prior year favorably impacted our
risk management activities in the prior year second quarter, and contributed to a reduction in
product costs that outpaced the decline in average selling prices. Conversely, the volatile
commodity price environment in the current fiscal year presented challenges in managing pricing
and, as a result, average product costs increased at a faster pace than average selling prices in
the second quarter of fiscal 2010.
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
|
March 27, |
|
|
March 28, |
|
|
|
|
|
|
Percent |
|
(Dollars in thousands) |
|
2010 |
|
|
2009 |
|
|
Decrease |
|
|
Decrease |
|
Operating expenses |
|
$ |
78,508 |
|
|
$ |
86,848 |
|
|
$ |
(8,340 |
) |
|
|
(9.6 |
%) |
As a percent of total revenues |
|
|
16.7 |
% |
|
|
19.5 |
% |
|
|
|
|
|
|
|
|
23
All costs of operating our retail distribution and appliance sales and service operations are
reported within operating expenses in the condensed consolidated statements of operations. These
operating expenses include the compensation and benefits of field and direct operating support
personnel, costs of operating and maintaining our vehicle fleet, overhead and other costs of our
purchasing, training and safety departments and other direct and indirect costs of operating our
customer service centers.
Operating expenses of $78.5 million in the second quarter of fiscal 2010 decreased $8.3
million, or 9.6%, compared to $86.8 million in the prior year second quarter as a result of lower
variable compensation associated with lower earnings, lower payroll and benefit related expense
resulting from operating efficiencies, and lower insurance costs.
General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
|
March 27, |
|
|
March 28, |
|
|
|
|
|
|
Percent |
|
(Dollars in thousands) |
|
2010 |
|
|
2009 |
|
|
Increase |
|
|
Increase |
|
General and administrative
expenses |
|
$ |
20,257 |
|
|
$ |
17,793 |
|
|
$ |
2,464 |
|
|
|
13.8 |
% |
As a percent of total revenues |
|
|
4.3 |
% |
|
|
4.0 |
% |
|
|
|
|
|
|
|
|
All costs of our back office support functions, including compensation and benefits for
executives and other support functions, as well as other costs and expenses to maintain finance and
accounting, treasury, legal, human resources, corporate development and the information systems
functions are reported within general and administrative expenses in the condensed consolidated
statements of operations.
General and administrative expenses of $20.3 million for second quarter of fiscal 2010
increased $2.5 million, or 13.8%, compared to $17.8 million in the prior year second quarter
primarily as a result of a reserve established for an unfavorable judgment in an uninsured legal
matter, partially offset by lower variable compensation associated with lower earnings.
Depreciation and Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
|
March 27, |
|
|
March 28, |
|
|
|
|
|
|
Percent |
|
(Dollars in thousands) |
|
2010 |
|
|
2009 |
|
|
Increase |
|
|
Increase |
|
Depreciation and amortization |
|
$ |
7,142 |
|
|
$ |
7,131 |
|
|
$ |
11 |
|
|
|
0.2 |
% |
As a percent of total revenues |
|
|
1.5 |
% |
|
|
1.6 |
% |
|
|
|
|
|
|
|
|
Depreciation and amortization expense of $7.1 million for the second quarter of fiscal 2010
was relatively flat compared to the prior year second quarter.
Interest Expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
|
March 27, |
|
|
March 28, |
|
|
|
|
|
|
Percent |
|
(Dollars in thousands) |
|
2010 |
|
|
2009 |
|
|
Decrease |
|
|
Decrease |
|
Interest expense, net |
|
$ |
6,608 |
|
|
$ |
9,442 |
|
|
$ |
(2,834 |
) |
|
|
(30.0 |
%) |
As a percent of total revenues |
|
|
1.4 |
% |
|
|
2.1 |
% |
|
|
|
|
|
|
|
|
24
Net interest expense of $6.6 million for the second quarter of fiscal 2010 decreased $2.8
million compared to $9.4 million in the prior year second quarter due to a reduction of $183.0
million in long-term borrowings since March 28, 2009. See Liquidity and Capital Resources below
for additional discussion on the reduction in long-term borrowings.
Net Income and EBITDA
Net income for the second quarter of fiscal 2010 amounted to $98.4 million, or $2.78 per
Common Unit, compared to $114.9 million, or $3.50 per Common Unit, in the prior year quarter.
Earnings before interest, taxes, depreciation and amortization (EBITDA) for the second quarter of
fiscal 2010 amounted to $112.5 million, compared to $132.3 million in the prior year second
quarter. Net income and EBITDA for the second quarter of fiscal 2010 included a loss on debt
extinguishment of $9.5 million associated with the senior debt refinancing completed during March
2010.
EBITDA represents income before deducting interest expense, income taxes, depreciation and
amortization. Adjusted EBITDA represents EBITDA excluding the unrealized net gain or loss on
mark-to-market activity for derivative instruments and loss on debt extinguishment. Our management
uses EBITDA as a measure of liquidity and we disclose it because we believe that it provides our
investors and industry analysts with additional information to evaluate our ability to meet our
debt service obligations and to pay our quarterly distributions to holders of our Common Units. In
addition, certain of our incentive compensation plans covering executives and other employees
utilize Adjusted EBITDA as the performance target. Moreover, our revolving credit agreement
requires us to use Adjusted EBITDA as a component in calculating our leverage and interest coverage
ratios. EBITDA and Adjusted EBITDA are not recognized terms under GAAP and should not be
considered as an alternative to net income or net cash (used in) provided by operating activities
determined in accordance with GAAP. Because EBITDA and Adjusted EBITDA as determined by us
excludes some, but not all, items that affect net income, they may not be comparable to EBITDA and
Adjusted EBITDA or similarly titled measures used by other companies.
The following table sets forth (i) our calculations of EBITDA and Adjusted EBITDA and (ii) a
reconciliation of Adjusted EBITDA, as so calculated, to our net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 27, |
|
|
March 28, |
|
(Dollars in thousands) |
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
98,388 |
|
|
$ |
114,866 |
|
Add: |
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
328 |
|
|
|
886 |
|
Interest expense, net |
|
|
6,608 |
|
|
|
9,442 |
|
Depreciation and amortization |
|
|
7,142 |
|
|
|
7,131 |
|
|
|
|
|
|
|
|
EBITDA |
|
|
112,466 |
|
|
|
132,325 |
|
Unrealized (non-cash) losses on changes
in fair value of derivatives |
|
|
1,732 |
|
|
|
9,690 |
|
Loss on debt extinguishment |
|
|
9,473 |
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
|
123,671 |
|
|
|
142,015 |
|
Add (subtract): |
|
|
|
|
|
|
|
|
Provision for income taxes current |
|
|
(328 |
) |
|
|
(426 |
) |
Interest expense, net |
|
|
(6,608 |
) |
|
|
(9,442 |
) |
Unrealized (non-cash) (losses) on changes
in fair value of derivatives |
|
|
(1,732 |
) |
|
|
(9,690 |
) |
Compensation cost recognized under Restricted Unit Plan |
|
|
1,025 |
|
|
|
672 |
|
Gain on disposal of property, plant and equipment, net |
|
|
293 |
|
|
|
(393 |
) |
Changes in working capital and other assets and liabilities |
|
|
(44,264 |
) |
|
|
11,212 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
72,057 |
|
|
$ |
133,948 |
|
|
|
|
|
|
|
|
25
Six Months Ended March 27, 2010 Compared to Six Months Ended March 28, 2009
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
|
|
|
|
March 27, |
|
|
March 28, |
|
|
|
|
|
|
Percent |
|
(Dollars in thousands) |
|
2010 |
|
|
2009 |
|
|
Decrease |
|
|
Decrease |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Propane |
|
$ |
602,872 |
|
|
$ |
610,821 |
|
|
$ |
(7,949 |
) |
|
|
(1.3 |
%) |
Fuel oil and refined fuels |
|
|
100,558 |
|
|
|
119,329 |
|
|
|
(18,771 |
) |
|
|
(15.7 |
%) |
Natural gas and electricity |
|
|
45,703 |
|
|
|
54,374 |
|
|
|
(8,671 |
) |
|
|
(15.9 |
%) |
All other |
|
|
21,462 |
|
|
|
24,016 |
|
|
|
(2,554 |
) |
|
|
(10.6 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
770,595 |
|
|
$ |
808,540 |
|
|
$ |
(37,945 |
) |
|
|
(4.7 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues decreased $37.9 million, or 4.7%, to $770.6 million for the six months ended
March 27, 2010 compared to $808.5 million for the six months ended March 28, 2009 due to lower
volumes, partially offset by higher average selling prices associated with higher product costs.
Volumes were lower than the prior year period due to the impact of continued adverse economic
conditions, particularly on our commercial and industrial accounts, as well as ongoing customer
conservation efforts and the unfavorable impact of warmer temperatures. On an overall basis,
average temperatures in our service territories during the first half of fiscal 2010 were 3% warmer
than both normal levels and the comparable prior year period. In our northeastern territories,
which is where we have a higher concentration of residential customers and all of our fuel oil
customers, average temperatures during the first six months of fiscal 2010 were 6% warmer than the
comparable prior year period.
Revenues from the distribution of propane and related activities of $602.9 million in the
first six months of fiscal 2010 decreased $7.9 million, or 1.3%, compared to $610.8 million in the
prior year period, due to lower volumes, particularly in our commercial and industrial accounts,
partially offset by higher average selling prices. Retail propane gallons sold in the first six
months of fiscal 2010 decreased 19.1 million gallons, or 8.2%, to 214.4 million gallons from 233.6
million gallons in the prior year period. The volume decline was primarily attributable to lower
commercial and industrial volumes resulting from adverse economic conditions, an unfavorable
weather pattern and, to a lesser extent, continued customer conservation. Lower volumes sold in
the non-residential customer base accounted for approximately 63% of the decline in propane sales
volume. Average propane selling prices in the first six months of fiscal 2010 increased 7.2%
compared to the prior year period due to higher product costs, thereby having a positive impact on
revenues. Additionally, included within the propane segment are revenues from wholesale and other
propane activities of $25.8 million in the first six months of fiscal 2010, which increased $1.1
million compared to the prior year period.
Revenues from the distribution of fuel oil and refined fuels of $100.6 million in the first
six months of fiscal 2010 decreased $18.8 million, or 15.7%, from $119.3 million in the prior year
period, primarily due to lower volumes, partially offset by higher average selling prices. Fuel
oil and refined fuels gallons sold in the first six months of fiscal 2010 decreased 9.4 million
gallons, or 23.0%, to 31.4 million gallons from 40.8 million gallons in the prior year period.
Lower volumes in our fuel oil and refined fuels segment were attributable to the aforementioned
warmer average temperatures in the northeast region, as well as the impact of ongoing customer
conservation driven by adverse economic conditions. Average selling prices in our fuel oil
and refined fuels segment in the first six months of fiscal 2010 increased 9.1% compared to the
prior year period due to higher product costs, thereby having a positive impact on revenues.
Revenues in our natural gas and electricity segment decreased $8.7 million, or 15.9%, to $45.7
million in the first six months of fiscal 2010 compared to $54.4 million in the prior year period
primarily as a result of lower natural gas average selling prices. Revenues in our all other
segment decreased 10.6% to $21.5 million in the first six months of fiscal 2010 from $24.0 million
in the prior year period primarily due to reduced installation activities as a result of the market
decline in residential and commercial construction and other adverse economic conditions.
26
Cost of Products Sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
Percent |
|
|
|
March 27, |
|
|
March 28, |
|
|
Increase |
|
|
Increase |
|
(Dollars in thousands) |
|
2010 |
|
|
2009 |
|
|
(Decrease) |
|
|
(Decrease) |
|
Cost of products sold |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Propane |
|
$ |
291,326 |
|
|
$ |
259,086 |
|
|
$ |
32,240 |
|
|
|
12.4 |
% |
Fuel oil and refined fuels |
|
|
67,206 |
|
|
|
75,517 |
|
|
|
(8,311 |
) |
|
|
(11.0 |
%) |
Natural gas and electricity |
|
|
34,174 |
|
|
|
41,848 |
|
|
|
(7,674 |
) |
|
|
(18.3 |
%) |
All other |
|
|
6,119 |
|
|
|
6,038 |
|
|
|
81 |
|
|
|
1.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of products sold |
|
$ |
398,825 |
|
|
$ |
382,489 |
|
|
$ |
16,336 |
|
|
|
4.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percent of total revenues |
|
|
51.8 |
% |
|
|
47.3 |
% |
|
|
|
|
|
|
|
|
Cost of products sold increased $16.3 million, or 4.3%, to $398.8 million in the first six
months of fiscal 2010 compared to $382.5 million in the prior year period due to higher average
product costs, and to a lesser extent, the unfavorable impact of non-cash mark-to-market
adjustments from our risk management activities in the first six months of fiscal 2010 compared to
the prior year period, partially offset by lower volumes sold. Average posted prices for propane
and fuel oil in the first six months of fiscal 2010 were 58.4% and 26.9% higher, respectively,
compared to the prior year period. Cost of products sold in the first six months of fiscal 2010
included a $5.1 million unrealized (non-cash) loss representing the net change in the fair value of
derivative instruments during the period, compared to a $5.3 million unrealized (non-cash) gain in
the prior year period resulting in an increase of $10.4 million in cost of products sold in the
first six months of fiscal 2010 compared to the prior year period ($3.2 million increase reported
within the propane segment and $7.2 million increase reported within the fuel oil and refined fuels
segment).
Cost of products sold associated with the distribution of propane and related activities of
$291.3 million in the first six months of fiscal 2010 increased $32.2 million, or 12.4%, compared
to the prior year period. Higher propane product costs resulted in an increase of $46.6 million in
cost of products sold in the first six months of fiscal 2010 compared to the prior year period.
This increase was partially offset by lower propane volumes, which resulted in a decrease of $21.6
million in cost of products sold in the first six months of fiscal 2010 compared to the prior year
period. Cost of products sold from wholesale and other propane activities increased $4.0 million
compared to the prior year period.
Cost of products sold associated with our fuel oil and refined fuels segment of $67.2 million
in the first six months of fiscal 2010 decreased $8.3 million, or 11.0%, compared to the prior year
period primarily due to lower volumes, offset to an extent by higher product costs. Lower fuel oil
volumes resulted in a decrease of $17.8 million in cost of products sold, and higher product costs
resulted in an increase of $2.3 million in cost of products sold during the first six months of
fiscal 2010 compared to the prior year period.
Cost of products sold in our natural gas and electricity segment of $34.2 million in the first
six months of fiscal 2010 decreased $7.7 million, or 18.3%, compared to the prior year period
primarily due to lower natural gas product costs. Cost of products sold in our all other segment
of $6.1 million was relatively flat compared to the prior year period.
For the first six months of fiscal 2010, total cost of products sold as a percent of total
revenues increased 4.5 percentage points to 51.8% from 47.3% in the prior year period. The
increase in cost of products sold as a percentage of revenues was primarily attributable to the
favorable margins reported in the first six months of the prior year that were attributable to the
declining commodity price environment during that period, which situation was not repeated in the
first six months of the current year due to the rising commodity price environment in the current
year. The declining commodity price environment in the first half of the prior year favorably
impacted our risk management activities in the prior year period, and contributed to a reduction in
product costs that outpaced the decline in average selling prices. Conversely, the volatile
commodity price environment in the current fiscal year presented challenges in managing pricing
and, as a result, average product costs increased at a faster pace than average selling prices in
the first six months of fiscal 2010.
27
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
|
|
|
|
March 27, |
|
|
March 28, |
|
|
|
|
|
|
Percent |
|
(Dollars in thousands) |
|
2010 |
|
|
2009 |
|
|
Decrease |
|
|
Decrease |
|
Operating expenses |
|
$ |
152,995 |
|
|
$ |
163,911 |
|
|
$ |
(10,916 |
) |
|
|
(6.7 |
%) |
As a percent of total revenues |
|
|
19.9 |
% |
|
|
20.3 |
% |
|
|
|
|
|
|
|
|
Operating expenses of $153.0 million in the first six months of fiscal 2010 decreased $10.9
million, or 6.7%, compared to $163.9 million in the prior year period as a result of lower variable
compensation associated with lower earnings, lower payroll and benefit related expense resulting
from operating efficiencies, lower insurance costs and lower fuel costs to operate our fleet.
General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
|
|
|
|
March 27, |
|
|
March 28, |
|
|
|
|
|
|
Percent |
|
(Dollars in thousands) |
|
2010 |
|
|
2009 |
|
|
Increase |
|
|
Increase |
|
General and administrative
expenses |
|
$ |
33,995 |
|
|
$ |
32,563 |
|
|
$ |
1,432 |
|
|
|
4.4 |
% |
As a percent of total revenues |
|
|
4.4 |
% |
|
|
4.0 |
% |
|
|
|
|
|
|
|
|
General and administrative expenses of $34.0 million for first six months of fiscal 2010
increased $1.4 million, or 4.4%, compared to $32.6 million in the prior year period primarily as a
result of an unfavorable judgment in an uninsured legal matter, partially offset by lower variable
compensation associated with lower earnings.
Depreciation and Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
|
|
|
|
March 27, |
|
|
March 28, |
|
|
|
|
|
|
Percent |
|
(Dollars in thousands) |
|
2010 |
|
|
2009 |
|
|
Increase |
|
|
Increase |
|
Depreciation and amortization |
|
$ |
14,226 |
|
|
$ |
14,154 |
|
|
$ |
72 |
|
|
|
0.5 |
% |
As a percent of total revenues |
|
|
1.8 |
% |
|
|
1.8 |
% |
|
|
|
|
|
|
|
|
Depreciation and amortization expense of $14.2 million for the first six months of fiscal 2010
was relatively flat compared to the prior year period.
28
Interest Expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
|
|
|
|
March 27, |
|
|
March 28, |
|
|
|
|
|
|
Percent |
|
(Dollars in thousands) |
|
2010 |
|
|
2009 |
|
|
Decrease |
|
|
Decrease |
|
Interest expense, net |
|
$ |
13,791 |
|
|
$ |
18,845 |
|
|
$ |
(5,054 |
) |
|
|
(26.8 |
%) |
As a percent of total revenues |
|
|
1.8 |
% |
|
|
2.3 |
% |
|
|
|
|
|
|
|
|
Net interest expense of $13.8 million for the first six months of fiscal 2010 decreased $5.0
million compared to $18.8 million in the prior year period due to a reduction of $183.0 million in
long-term borrowings since March 28, 2009. See Liquidity and Capital Resources below for additional
discussion on the reduction in long-term borrowings.
Net Income and EBITDA
Net income for the first six months of fiscal 2010 amounted to $146.8 million, or $4.15 per
Common Unit, a decrease of $48.8 million, or $1.81 per Common Unit, compared to the prior year
periods net income of $195.6 million, or $5.96 per Common Unit. EBITDA amounted to $175.3 million
for the first six months of fiscal 2010 compared to $229.6 million in the prior year period. Net
income and EBITDA for the first six months of fiscal 2010 included a loss on debt extinguishment of
$9.5 million associated with the senior debt refinancing completed during March 2010.
The following table sets forth (i) our calculations of EBITDA and Adjusted EBITDA and (ii) a
reconciliation of Adjusted EBITDA, as so calculated, to our net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
March 27, |
|
|
March 28, |
|
(Dollars in thousands) |
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
146,763 |
|
|
$ |
195,554 |
|
Add: |
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
527 |
|
|
|
1,024 |
|
Interest expense, net |
|
|
13,791 |
|
|
|
18,845 |
|
Depreciation and amortization |
|
|
14,226 |
|
|
|
14,154 |
|
|
|
|
|
|
|
|
EBITDA |
|
|
175,307 |
|
|
|
229,577 |
|
Unrealized (non-cash) losses (gains) on changes
in fair value of derivatives |
|
|
(5,140 |
) |
|
|
5,316 |
|
Loss on debt extinguishment |
|
|
9,473 |
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
|
179,640 |
|
|
|
234,893 |
|
Add (subtract): |
|
|
|
|
|
|
|
|
Provision for income taxes current |
|
|
(527 |
) |
|
|
(564 |
) |
Interest expense, net |
|
|
(13,791 |
) |
|
|
(18,845 |
) |
Unrealized (non-cash) (losses) gains on changes
in fair value of derivatives |
|
|
5,140 |
|
|
|
(5,316 |
) |
Compensation cost recognized under Restricted Unit Plan |
|
|
2,017 |
|
|
|
1,241 |
|
Gain on disposal of property, plant and equipment, net |
|
|
(134 |
) |
|
|
(623 |
) |
Changes in working capital and other assets and liabilities |
|
|
(115,014 |
) |
|
|
(51,834 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
57,331 |
|
|
$ |
158,952 |
|
|
|
|
|
|
|
|
29
Liquidity and Capital Resources
Analysis of Cash Flows
Operating Activities. Net cash provided by operating activities for the first six months of
fiscal 2010 was $57.3 million, compared to net cash provided by operating activities of $159.0
million for the first six months of the prior year period. The decrease in net cash provided by
operating activities was primarily attributable to the increase in propane and fuel oil commodity
prices that resulted in a larger investment in working capital, coupled with a decrease in earnings
in the first six months of fiscal 2010 compared to the first six months of the prior year. Despite
the year over year increase in working capital requirements, we continued to fund working capital
through cash on hand without the need to access the revolving credit facility.
Investing Activities. Net cash used in investing activities of $7.2 million for the first six
months of fiscal 2010 consisted of capital expenditures of $9.5 million (including $4.0 million for
maintenance expenditures and $5.5 million to support the growth of operations), partially offset by
$2.3 million in net proceeds from the sale of property, plant and equipment. Net cash used in
investing activities of $6.2 million for the first six months of fiscal 2009 consisted of capital
expenditures of $8.3 million (including $3.6 million for maintenance expenditures and $4.7 million
to support the growth of operations), partially offset by $2.1 million in net proceeds from the
sale of property, plant and equipment.
Financing Activities. Net cash used in financing activities for the first six months of
fiscal 2010 of $72.4 million reflects quarterly distributions to Common Unitholders at a rate of
$0.830 per Common Unit paid in respect of the fourth quarter of fiscal 2009 and $0.835 per Common
Unit paid in respect of the first quarter of fiscal 2010. In addition, financing activities for
the first six months of fiscal 2010 reflects the repurchase of $250.0 million aggregate principal
amount of our 6.875% senior notes due 2013 for $256.5 million (including repurchase premiums and
fees), which was substantially funded by the net proceeds of $247.8 million from the issuance of
7.375% senior notes due 2020, as well as the $5.0 million payment of debt issuance costs associated
with the issuance of the 2020 senior notes.
Net cash used in financing activities for the six months ended March 28, 2009 of $55.0 million
reflects quarterly distributions to Common Unitholders at a rate of $0.805 per Common Unit paid in
respect of the fourth quarter of fiscal 2008 and $0.810 per Common Unit paid in respect of the
first quarter of fiscal 2009, as well as a prepayment of $2.0 million under our previously
outstanding term loan.
Summary of Long-Term Debt Obligations and Revolving Credit Lines
On March 23, 2010, we completed a public offering of $250.0 million in aggregate principal
amount of 7.375% senior notes due 2020 (the 2020 Senior Notes). The 2020 Senior Notes were
issued at 99.136% of the principal amount. The net proceeds from the issuance, along with cash on
hand, were used to repurchase the 6.875% senior notes due 2013 on March 23, 2010 through a
redemption and tender offer. In connection with the repurchase of the 2013 Senior Notes, we
recognized a loss on the extinguishment of debt of $9.5 million in the second quarter of fiscal
2010, consisting of $7.2 million for the repurchase premium and related fees, as well as the
write-off of $2.3 million in unamortized debt origination costs and unamortized discount.
As of March 27, 2010, our long-term borrowings and revolving credit lines consist of the
2020 Senior Notes and a $250.0 million senior secured revolving credit facility at the Operating
Partnership level (the Revolving Credit Facility). The Revolving Credit Facility was executed on
June 26, 2009 and replaced the Operating Partnerships previous credit facility which, as amended,
provided for a $108.0 million term loan (the Term Loan) and a separate $175.0 million working
capital facility both of which were scheduled to mature in March 2010. Borrowings under the
Revolving Credit Facility may be used for general corporate purposes, including working capital,
capital expenditures and acquisitions until maturity on June 25, 2013. Our Operating Partnership
has the right to prepay loans under the Revolving Credit Facility, in whole or in part, without
penalty at any time prior to maturity. At closing, the Operating Partnership borrowed $100.0
million under the Revolving Credit Facility and, with cash on hand, repaid the $108.0 million then
outstanding under the Term Loan and terminated the previous credit agreement. We have standby
letters of credit issued under the Revolving Credit Facility in the aggregate amount of $61.9
million primarily in support of retention levels under our self-insurance programs, which expire
periodically through April 3, 2011. Therefore, as of March 27, 2010 we had available borrowing
capacity of $88.1 million under the Revolving Credit Facility.
30
The 2020 Senior Notes mature on March 15, 2020 and require semi-annual interest payments.
We are permitted to redeem some or all of the 2020 Senior Notes any time at redemption prices
specified in the indenture governing the notes. In addition, the 2020 Senior Notes have a change
of control provision that would require us to offer to repurchase the notes at 101% of the
principal amount repurchased, if the change of control is followed by a rating decline (a decrease
in the rating of the notes by either Moodys Investors Service or Standard and Poors Rating group
by one or more gradations) within 90 days of the consummation of the change of control.
Borrowings under the Revolving Credit Facility bear interest at prevailing interest rates
based upon, at our Operating Partnerships option, LIBOR plus the applicable margin or the base
rate, defined as the higher of the Federal Funds Rate plus 1/2 of 1%, the agent banks prime rate, or
LIBOR plus 1%, plus in each case the applicable margin. The applicable margin is dependent upon
our ratio of total debt to EBITDA on a consolidated basis, as defined in the Revolving Credit
Facility. As of March 27, 2010, the interest rate for the Revolving Credit Facility was
approximately 3.3%. The interest rate and the applicable margin will be reset at the end of each
calendar quarter.
In connection with the Revolving Credit Facility, our Operating Partnership amended its
existing interest rate swap agreement, which has a termination date of March 31, 2010, to reduce
the notional amount to $100.0 million from $108.0 million. Our Operating Partnership will pay a
fixed interest rate of 4.66% to the issuing lender on the notional principal amount outstanding,
effectively fixing the LIBOR portion of the interest rate at 4.66%. In return, the issuing lender
will pay to our Operating Partnership a floating rate, namely LIBOR, on the same notional principal
amount. On July 31, 2009, our Operating Partnership entered into a forward starting interest rate
swap agreement with a March 31, 2010 effective date, which is commensurate with the maturity of the
existing interest rate swap agreement, and termination date of June 25, 2013. Under the forward
starting interest rate swap agreement, our Operating Partnership will pay a fixed interest rate of
3.12% to the issuing lender on the notional principal amount outstanding, effectively fixing the
LIBOR portion of the interest rate at 3.12%. In return, the issuing lender will pay to our
Operating Partnership a floating rate, namely LIBOR, on the same notional principal amount.
The Revolving Credit Facility and the 2020 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. The Revolving Credit Facility contains
certain financial covenants (a) requiring the consolidated interest coverage ratio, as defined, at
the Partnership level to be not less than 2.5 to 1.0 as of the end of any fiscal quarter; (b)
prohibiting the total consolidated leverage ratio, as defined, at the Partnership level from being
greater than 4.5 to 1.0 as of the end of any fiscal quarter; and (c) prohibiting the senior secured
consolidated leverage ratio, as defined, of the Operating Partnership from being greater than 3.0
to 1.0 as of the end of any fiscal quarter. Under the 2020 Senior Note indenture, we are generally
permitted to make cash distributions equal to available cash, as defined, as of the end of the
immediately preceding quarter, if no event of default exists or would exist upon making such
distributions, and the Partnerships consolidated fixed charge coverage ratio, as defined, is
greater than 1.75 to 1. We were in compliance with all covenants and terms of the 2020 Senior Notes
and the Revolving Credit Facility as of March 27, 2010.
Partnership Distributions
We are required to make distributions in an amount equal to all of our Available Cash, as
defined in the Third Amended and Restated Partnership Agreement, as amended (the Partnership
Agreement), as amended, no more than 45 days after the end of each fiscal quarter to holders of
record on the applicable record dates. Available Cash, as defined in the Partnership Agreement,
generally means all cash on hand at the end of the respective fiscal quarter less the amount of
cash reserves established by the Board of Supervisors in its reasonable discretion for future cash
requirements. These reserves are retained for the proper conduct of our business, the payment of
debt principal and interest and for distributions during the next four quarters. The Board of
Supervisors reviews the level of Available Cash on a quarterly basis based upon information
provided by management.
31
On April 22, 2010, we announced a quarterly distribution of $0.84 per Common Unit, or $3.36 on
an annualized basis, in respect of the second quarter of fiscal 2010 payable on May 11, 2010 to
holders of record on May 4, 2010. The annualized distribution represents an increase of $0.02 per
Common Unit from the previous distribution rate, representing the twenty-fifth increase since our
recapitalization in 1999 and a growth rate of 3.1% in the quarterly distribution rate compared to
the second quarter of fiscal 2009.
Other Commitments
We have a noncontributory, cash balance format, defined benefit pension plan which was frozen
to new participants effective January 1, 2000. Effective January 1, 2003, the defined benefit
pension plan was amended such that future service credits ceased and eligible employees would
receive interest credits only toward their ultimate retirement benefit. We also provide
postretirement health care and life insurance benefits for certain retired employees under a plan
that was also frozen to new participants effective January 1, 2000. At March 27, 2010, we had a
liability for the defined benefit pension plan and accrued retiree health and life benefits of
$16.8 million and $20.9 million, respectively.
We are self-insured for general and product, workers compensation and automobile liabilities
up to predetermined thresholds above which third party insurance applies. At March 27, 2010, we
had accrued insurance liabilities of $56.2 million, and an insurance recovery asset of $18.2
million related to the amount of the liability expected to be covered by insurance carriers.
Off-Balance Sheet Arrangements
Guarantees
We have residual value guarantees associated with certain of our operating leases, related
primarily to transportation equipment, with remaining lease periods scheduled to expire
periodically through fiscal 2017. Upon completion of the lease period, we guarantee that the fair
value of the equipment will equal or exceed the guaranteed amount, or we will pay the lessor the
difference. Although the fair value of equipment at the end of its lease term has historically
exceeded the guaranteed amounts, the maximum potential amount of aggregate future payments we could
be required to make under these leasing arrangements, assuming the equipment is deemed worthless at
the end of the lease term, is approximately $9.4 million as of March 27, 2010. The fair value of
residual value guarantees for outstanding operating leases was de minimis as of March 27, 2010 and
September 26, 2009.
Recently Issued Accounting Standards
In
December 2008, the Financial Accounting Standards Board issued new financial
reporting guidance to require more detailed disclosures about employers pension plan assets. These
new disclosures will include more information on investment strategies, major categories of plan
assets, concentrations of risk within plan assets and valuation techniques used to measure the fair
value of plan assets. The new guidance is effective for fiscal years ending after December 15,
2009, which is our 2010 fiscal year ending September 25, 2010. Since it only addresses
disclosures, the adoption of the new guidance is not expected to have an impact on our consolidated
financial position, results of operations and cash flows.
32
|
|
|
ITEM 3. |
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Commodity Price Risk
We enter into product supply contracts that are generally one-year agreements subject to
annual renewal, and also purchase product on the open market. Our propane supply contracts
typically provide for pricing based upon index formulas using the posted prices established at
major supply points such as Mont Belvieu, Texas, or Conway, Kansas (plus transportation costs) at
the time of delivery. In addition, to supplement our annual purchase requirements, we may utilize
forward fixed price purchase contracts to acquire a portion of the propane that we resell to our
customers, which allows us to manage our exposure to unfavorable changes in commodity prices and to
ensure adequate physical supply. The percentage of contract purchases, and the amount of supply
contracted for under forward contracts at fixed prices, will vary from year to year based on market
conditions. In certain instances, and when market conditions are favorable, we are able to
purchase product under our supply arrangements at a discount to the market.
Product cost changes can occur rapidly over a short period of time and can impact
profitability. We attempt to reduce commodity price risk by pricing product on a short-term basis.
The level of priced, physical product maintained in storage facilities and at our customer service
centers for immediate sale to our customers will vary depending on several factors, including, but
not limited to, price, availability of supply, and demand for a given time of the year. Typically,
our on hand priced position does not exceed more than four to eight weeks of our supply needs,
depending on the time of the year. In the course of normal operations, we routinely enter into
contracts such as forward priced physical contracts for the purchase or sale of propane and fuel
oil that, under accounting rules for derivative instruments and hedging activities, qualify for and
are designated as normal purchase or normal sale contracts. Such contracts are exempted from fair
value accounting and are accounted for at the time product is purchased or sold under the related
contract.
Under our hedging and risk management strategies, we enter into a combination of
exchange-traded futures and option contracts and, in certain instances, over-the-counter option
contracts (collectively, derivative instruments) to manage the price risk associated with priced,
physical product and with future purchases of the commodities used in our operations, principally
propane and fuel oil, as well as to ensure the availability of product during periods of high
demand. We do not use derivative instruments for speculative or trading purposes. Futures
contracts require that we sell or acquire propane or fuel oil at a fixed price for delivery at
fixed future dates. An option contract allows, but does not require, its holder to buy or sell
propane or fuel oil at a specified price during a specified time period. However, 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 the product to
the respective party or are settled by the payment of a net amount equal to the difference between
the then current price and the fixed contract price or option exercise price. To the extent that we
utilize derivative instruments to manage exposure to commodity price risk and commodity prices move
adversely in relation to the contracts, we could suffer losses on those derivative instruments when
settled. Conversely, if prices move favorably, we could realize gains. Under our hedging and risk
management strategy, realized gains or losses on derivative instruments will typically offset
losses or gains on the physical inventory once the product is sold to customers at market prices.
Market Risk
We are subject to commodity price risk to the extent that propane or fuel oil market prices
deviate from fixed contract settlement amounts. Futures traded with brokers of the NYMEX require
daily cash settlements in margin accounts. Forward and option contracts are generally settled at
the expiration of the contract term either by physical delivery or through a net settlement
mechanism. Market risks associated with futures, options and forward contracts are monitored daily
for compliance with our Hedging and Risk Management Policy which includes volume limits for open
positions. Open inventory positions are reviewed and managed daily as to exposures to changing
market prices.
33
Credit Risk
Exchange traded futures and option contracts are guaranteed by the NYMEX and, as a result,
have minimal credit risk. We are subject to credit risk with over-the-counter forward and propane
option contracts to the extent the counterparties do not perform. We evaluate the financial
condition of each counterparty with which we conduct business and establish credit limits to reduce
exposure to the risk of non-performance by our counterparties.
Interest Rate Risk
A portion of our borrowings bear interest at prevailing interest rates based upon, at the
Operating Partnerships option, LIBOR, plus an applicable margin or the base rate, defined as the
higher of the Federal Funds Rate plus 1/2 of 1% or the agent banks prime rate, or LIBOR plus 1%,
plus the applicable margin. The applicable margin is dependent on the level of the Partnerships
total leverage (the total of debt to EBITDA). Therefore, we are subject to interest rate risk on
the variable component of the interest rate. We manage our interest rate risk by entering into
interest rate swap agreements. The interest rate swaps have been designated as a cash flow hedge.
Changes in the fair value of the interest rate swaps are recognized in other comprehensive income
(OCI) until the hedged item is recognized in earnings. At March 27, 2010, the fair value of the
interest rate swaps was $4.0 million representing an unrealized loss and is included within other
current liabilities and other liabilities, as applicable, with a corresponding debit in OCI.
Derivative Instruments and Hedging Activities
All of our derivative instruments are reported on the balance sheet at their fair values. On
the date that futures, forward and option contracts are entered into, we make a determination as to
whether the derivative instrument qualifies for designation as a hedge. Changes in the fair value
of derivative instruments are recorded each period in current period earnings or OCI, depending on
whether a derivative instrument is designated as a hedge and, if so, the type of hedge. For
derivative instruments designated as cash flow hedges, we formally assess, both at the hedge
contracts inception and on an ongoing basis, whether the hedge contract is highly effective in
offsetting changes in cash flows of hedged items. Changes in the fair value of derivative
instruments designated as cash flow hedges are reported in OCI to the extent effective and
reclassified into cost of products sold during the same period in which the hedged item affects
earnings. The mark-to-market gains or losses on ineffective portions of cash flow hedges are
immediately recognized in cost of products sold. Changes in the fair value of derivative
instruments that are not designated as cash flow hedges, and that do not meet the normal purchase
and normal sale exemption, are recorded within cost of products sold as they occur. Cash flows
associated with derivative instruments are reported as operating activities within the condensed
consolidated statement of cash flows.
At March 27, 2010, the fair value of derivative instruments described above resulted in
derivative assets (unrealized gains) of $1.1 million and derivative liabilities (unrealized
losses) of $1.7 million.
Sensitivity Analysis
In an effort to estimate our exposure to unfavorable market price changes in commodities
related to our open positions under derivative instruments, we developed a model that incorporates
the following data and assumptions:
|
A. |
|
The fair value of open positions as of March 27, 2010. |
|
B. |
|
The estimated forward market prices as of March 27, 2010 as derived from the
NYMEX for traded commodities. |
|
C. |
|
The market prices determined in B. above were adjusted adversely by a
hypothetical 10% change in the forward prices and compared to the fair value amounts
in A. above to project the potential negative impact on earnings that would be
recognized for the respective scenario. |
34
Based on the sensitivity analysis described above, a hypothetical 10% adverse change in market
prices for which futures and option contracts exists indicates potential future losses in future
earnings of $1.9 million as of March 27, 2010. See also Item 7A of our Annual Report on Form 10-K
for the fiscal year ended September 26, 2009. 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.
|
|
|
ITEM 4. |
|
CONTROLS AND PROCEDURES |
(a) The Partnership maintains disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) that are designed to provide
reasonable assurance that information required to be disclosed in the Partnerships filings and
submissions under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the periods specified in the rules and forms of the SEC and that such information
is accumulated and communicated to the Partnerships management, including its principal executive
officer and principal financial officer, as appropriate, to allow timely decisions regarding
required disclosure.
The Partnership completed an evaluation under the supervision and with participation of the
Partnerships management, including the Partnerships principal executive officer and principal
financial officer, of the effectiveness of the design and operation of the Partnerships disclosure
controls and procedures as of March 27, 2010. Based on this evaluation, the Partnerships
principal executive officer and principal financial officer have concluded that as of March 27,
2010, such disclosure controls and procedures were effective to provide the reasonable assurance
described above.
There have not been any changes in the Partnerships internal control over financial reporting
(as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934) during the
quarter ended March 27, 2010 that have materially affected or are reasonably likely to materially
affect its internal control over financial reporting.
35
PART II
(a) Exhibits
|
|
|
|
|
|
4.1 |
|
|
First Supplemental Indenture, dated as of March 19, 2010, relating to
the 6.875% Senior Notes due 2013, among Suburban Propane Partners,
L.P., Suburban Energy Finance Corporation and The Bank of New York
Mellon, as Trustee. (Incorporated by reference to Exhibit 4.1 to the
Partnerships Current Report on Form 8-K filed on March 19, 2010). |
|
|
|
|
|
|
4.2 |
|
|
Indenture, dated as of March 23, 2010, relating to the 7.375% Senior
Notes due 2020, among Suburban Propane Partners, L.P., Suburban
Energy Finance Corporation and The Bank of New York Mellon, as
Trustee, including the form of 7.375% Senior Notes due 2020.
(Incorporated by reference to Exhibit 4.1 to the Partnerships
Current Report on Form 8-K filed on March 23, 2010). |
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4.3 |
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First Supplemental Indenture, dated as of March 23, 2010, relating to
the 7.375% Senior Notes due 2020, among Suburban Propane Partners,
L.P., Suburban Energy Finance Corporation and The Bank of New York
Mellon, as Trustee. (Incorporated by reference to Exhibit 4.2 to the
Partnerships Current Report on Form 8-K filed on March 23, 2010). |
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10.1 |
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First Amendment to Credit Agreement, dated March 9, 2010, by and
among Suburban Propane, L.P., Suburban Propane Partners, L.P., each
lender signatory thereto and Bank of America, N.A., as the
administrative agent for the lenders therein. (Incorporated by
reference to Exhibit 10.1 in the Partnerships Current Report on Form
8-K dated March 9, 2010). |
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31.1 |
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Certification of the President and Chief Executive Officer Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith). |
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31.2 |
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Certification of the Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002. (Filed herewith). |
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32.1 |
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Certification of the President and Chief Executive Officer Pursuant
to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. (Filed herewith). |
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32.2 |
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Certification of the Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. (Filed herewith). |
36
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
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SUBURBAN PROPANE PARTNERS, L.P.
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May 6, 2010 |
By: |
/s/ MICHAEL A. STIVALA
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Date |
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Michael A. Stivala |
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Chief Financial Officer |
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May 6, 2010 |
By: |
/s/ MICHAEL A. KUGLIN
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Date |
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Michael A. Kuglin |
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Controller and Chief Accounting Officer |
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37