UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 ------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from ______ to ______ Commission File Number: 1-14222 ------- SUBURBAN PROPANE PARTNERS, L.P. ------------------------------- (Exact name of registrant as specified in its charter) Delaware 22-3410353 - -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 240 Route 10 West, Whippany, NJ 07981 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (973) 887-5300 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for each shorter period that the Registrant was required to file such reports), and (2) had been subject to such filing requirements for the past 90 days. Yes X No --- --- As of August 13, 2001: 24,631,287 Common Units were outstanding. This Report contains a total of 22 pages.
SUBURBAN PROPANE PARTNERS, L.P. AND SUBSIDIARIES Index to Form 10-Q PART I FINANCIAL INFORMATION Item 1 - Financial Statements (unaudited) Page ---- Condensed Consolidated Balance Sheets as of June 30, 2001 and September 30, 2000 3 Condensed Consolidated Statements of Operations for the three months ended June 30, 2001 and June 24, 2000 4 Condensed Consolidated Statements of Operations for the nine months ended June 30, 2001 and June 24, 2000 5 Condensed Consolidated Statements of Cash Flows for the three and nine months ended June 30, 2001 and June 24, 2000 6 Condensed Consolidated Statement of Partners' Capital for the nine months ended June 30, 2001 7 Notes to Condensed Consolidated Financial Statements 8 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Item 3 - Quantitative and Qualitative Disclosures about Market Risk 19 PART II OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K 21 SIGNATURES 22 2
<TABLE> <CAPTION> SUBURBAN PROPANE PARTNERS, L.P. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) (unaudited) June 30, September 30, 2001 2000 --------- ------------- ASSETS Current assets: <S> <C> <C> Cash and cash equivalents ................................ $ 38,387 $ 11,645 Accounts receivable, less allowance for doubtful accounts of $5,355 and $2,975, respectively .................... 57,045 61,303 Inventories .............................................. 41,865 41,631 Prepaid expenses and other current assets ................ 5,468 7,581 --------- --------- Total current assets ............................. 142,765 122,160 Property, plant and equipment, net ........................... 344,834 350,640 Net prepaid pension cost ..................................... 33,603 33,687 Goodwill and other intangibles assets, net ................... 254,705 261,617 Other assets ................................................. 1,850 3,012 --------- --------- Total assets .................................... $ 777,757 $ 771,116 ========= ========= LIABILITIES AND PARTNERS' CAPITAL Current liabilities: Accounts payable ......................................... $ 39,977 $ 59,794 Accrued employment and benefit costs ..................... 26,387 18,979 Short-term borrowings .................................... -- 6,500 Current portion of long-term borrowings .................. 42,500 -- Accrued insurance ........................................ 7,620 6,170 Customer deposits and advances ........................... 7,251 23,164 Accrued interest ......................................... 16,424 8,171 Other current liabilities ................................ 7,339 8,683 --------- --------- Total current liabilities ...................... 147,498 131,461 Long-term borrowings ......................................... 430,293 517,219 Postretirement benefits obligation ........................... 33,937 33,885 Accrued insurance ............................................ 18,500 19,458 Other liabilities ............................................ 5,778 7,264 --------- --------- Total liabilities ............................. 636,006 709,287 --------- --------- Partners' capital: Common Unitholders ..................................... 140,508 58,474 General Partner ........................................ 2,560 1,866 Deferred compensation trust ............................ (11,567) (11,567) Common Units held in trust, at cost .................... 11,567 11,567 Unearned Compensation .................................. (1,317) (640) Accumulated other comprehensive income ................. -- 2,129 --------- --------- Total partners' capital ...................... 141,751 61,829 --------- --------- Total liabilities and partners' capital ...... $ 777,757 $ 771,116 ========= ========= </TABLE> The accompanying notes are an integral part of these condensed consolidated financial statements. 3
<TABLE> <CAPTION> SUBURBAN PROPANE PARTNERS, L.P. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per Unit amounts) (unaudited) Three Months Ended -------------------------------- June 30, 2001 June 24, 2000 ------------- ------------- Revenues <S> <C> <C> Propane ................................................... $ 124,370 $ 136,802 Other ..................................................... 18,934 17,157 --------- --------- 143,304 153,959 Costs and Expenses Cost of sales ............................................. 70,849 84,965 Operating ................................................. 63,401 52,919 General and administrative ................................ 5,119 6,595 Depreciation and amortization ............................. 9,477 9,865 --------- --------- 148,846 154,344 --------- --------- (Loss) before interest expense and provision for income taxes (5,542) (385) Interest expense, net ....................................... 8,912 10,243 --------- --------- (Loss) before provision for income taxes .................... (14,454) (10,628) Provision for income taxes .................................. 105 71 --------- --------- Net (loss) .................................................. $ (14,559) $ (10,699) ========= ========= General Partner's interest in net (loss) .................... $ (275) $ (214) --------- --------- Limited Partner's interest in net (loss) .................... $ (14,284) $ (10,485) ========= ========= Basic and diluted net (loss) per Unit ....................... $ (0.58) $ (0.47) ========= ========= Weighted average number of Units outstanding ................ 24,631 22,279 --------- --------- </TABLE> The accompanying notes are an integral part of these condensed consolidated financial statements. 4
<TABLE> <CAPTION> SUBURBAN PROPANE PARTNERS, L.P. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per Unit amounts) (unaudited) Nine Months Ended ------------------------------- June 30, 2001 June 24, 2000 ------------- ------------- Revenues <S> <C> <C> Propane ................................................... $ 725,556 $ 581,970 Other ..................................................... 64,439 63,331 --------- --------- 789,995 645,301 Costs and Expenses Cost of sales ............................................. 441,136 352,439 Operating ................................................. 192,447 167,580 General and administrative ................................ 22,561 20,210 Depreciation and amortization ............................. 29,082 28,755 Gain on sale of assets .................................... -- (10,328) --------- --------- 685,226 558,656 --------- --------- Income before interest expense and provision for income taxes 104,769 86,645 Interest expense, net ....................................... 29,165 29,885 --------- --------- Income before provision for income taxes .................... 75,604 56,760 Provision for income taxes .................................. 270 163 --------- --------- Net income .................................................. $ 75,334 $ 56,597 ========= ========= General Partner's interest in net income .................... $ 1,460 $ 1,132 --------- --------- Limited Partner's interest in net income .................... $ 73,874 $ 55,465 ========= ========= Basic and diluted net income per Unit ....................... $ 3.02 $ 2.49 ========= ========= Weighted average number of Units outstanding ................ 24,475 22,274 --------- --------- </TABLE> The accompanying notes are an integral part of these condensed consolidated financial statements. 5
<TABLE> <CAPTION> SUBURBAN PROPANE PARTNERS, L.P. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) Three Months Ended Nine Months Ended -------------------- -------------------- June 30, June 24, June 30, June 24, 2001 2000 2001 2000 -------- -------- -------- -------- Cash flows from operating activities: <S> <C> <C> <C> <C> Net (loss)/income ................................................... $(14,559) $(10,699) $ 75,334 $ 56,597 Adjustments to reconcile net (loss)/income to net cash provided by operations: Depreciation ................................................... 7,152 7,402 21,411 21,914 Amortization ................................................... 2,325 2,463 7,671 6,841 (Gain) on disposal of property, plant and equipment .................................................... (2,405) (654) (3,297) (11,246) Changes in operating assets and liabilities, net of acquisitions and dispositions: Decrease/(increase) in accounts receivable ..................... 53,939 34,735 4,258 (10,315) (Increase)/decrease in inventories ............................. (2,269) 5,330 (234) (4,299) Decrease/(increase) in prepaid expenses and other current assets .......................................... 379 (9) (266) (2,292) (Decrease) in accounts payable ................................. (5,835) (14,240) (19,817) (2,892) Increase/(decrease) in accrued employment and benefit costs ............................................. 1,980 206 7,742 (2,110) Increase in accrued interest ................................... 7,928 7,709 8,253 7,670 (Decrease) in other accrued liabilities ........................ (1,643) (588) (15,807) (11,131) Other noncurrent assets ............................................. 1,560 (101) 1,217 (638) Deferred credits and other noncurrent liabilities ................... (1,901) 820 (2,421) (502) -------- -------- -------- -------- Net cash provided by operating activities ................. 46,651 32,374 84,044 47,597 -------- -------- -------- -------- Cash flows from investing activities: Capital expenditures ............................................... (6,585) (4,950) (16,087) (14,322) Acquisitions ....................................................... -- (328) -- (98,012) Proceeds from sale of property, plant and equipment, net ........... 2,592 1,216 4,029 19,900 -------- -------- -------- -------- Net cash (used in) investing activities ................... (3,993) (4,062) (12,058) (92,434) -------- -------- -------- -------- Cash flows from financing activities: Long-term (repayments)/borrowings, net ............................. (378) (7,307) (44,397) 89,672 Short-term (repayments), net ....................................... (7,250) (10,000) (6,500) (2,750) Credit agreement expenses .......................................... -- -- (730) (3,123) Net proceeds from public offering .................................. -- -- 47,079 -- Partnership distribution ........................................... (13,807) (11,935) (40,696) (35,498) -------- -------- -------- -------- Net cash (used in)/provided by financing activities........ (21,435) (29,242) (45,244) 48,301 -------- -------- -------- -------- Net increase/(decrease) in cash .......................................... 21,223 (930) 26,742 3,464 Cash and cash equivalents at beginning of period ......................... 17,164 12,786 11,645 8,392 -------- -------- -------- -------- Cash and cash equivalents at end of period ............................... 38,387 11,856 38,387 11,856 ======== ======== ======== ======== Supplemental disclosure of cash flow information: Cash paid for interest ............................................... $ 1,088 $ 2,572 $ 21,010 $ 22,272 ======== ======== ======== ======== </TABLE> The accompanying notes are an integral part of these condensed consolidated financial statements. 6
<TABLE> <CAPTION> SUBURBAN PROPANE PARTNERS, L.P. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL (in thousands) (unaudited) Accumulated Deferred Common Other Number of Units Common General Compensation Units in Unearned Comprehensive Common Unitholders Partner Trust Trust Compensation Income --------------- ----------- ------- ------------ -------- ------------ ------------- <S> <C> <C> <C> <C> <C> <C> <C> Balance at September 30, 2000 ..... 22,279 $ 58,474 $ 1,866 $ (11,567) $ 11,567 $ (640) $ 2,129 Net income ......................... 73,874 1,460 Other comprehensive income: Unrealized holding loss arising during the period .............. (1,046) Less: reclassification adjustment for gains included in net income (1,083) --------- Comprehensive income ............... Partnership distribution ........... (39,930) (766) Sale of Common Units under public offering, net of expenses . 2,353 47,079 Grants issued under Restricted Unit Plan, net of forfeitures .... 1,011 (1,011) Amortization of Compensation Deferral Plan .................... 169 Amortization of Restricted Unit Plan, net of forfeitures .... -- -- -- -- -- 165 -- --------------- ----------- ------- ------------ -------- ------------ ------------- Balance at June 30, 2001 ........... 24,632 $ 140,508 $ 2,560 $ (11,567) $ 11,567 $ (1,317) $ -- =============== =========== ======= ============ ======== ============ ============= <CAPTION> Total Partners' Comprehensive Capital Income --------- ------------- <S> <C> <C> Balance at September 30, 2000 ..... $ 61,829 Net income ......................... 75,334 $ 75,334 Other comprehensive income: Unrealized holding loss arising during the period .............. (1,046) (1,046) Less: reclassification adjustment for gains included in net income (1,083) (1,083) --------- --------- Comprehensive income ............... $ 73,205 ========= Partnership distribution ........... (40,696) Sale of Common Units under public offering, net of expenses.. 47,079 Grants issued under Restricted Unit Plan, net of forfeitures .... -- Amortization of Compensation Deferral Plan .................... 169 Amortization of Restricted Unit Plan, net of forfeitures .... 165 --------- Balance at June 30, 2001 ........... $ 141,751 ========= </TABLE> The accompanying notes are an integral part of these condensed consolidated financial statements. 7
SUBURBAN PROPANE PARTNERS, L.P. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements June 30, 2001 (Dollars in Thousands) (Unaudited) 1. PARTNERSHIP ORGANIZATION AND FORMATION -------------------------------------- Suburban Propane Partners, L.P. (the "Partnership") and its subsidiary, Suburban Propane, L.P. (the "Operating Partnership"), were formed as Delaware limited partnerships on December 19, 1995 to acquire and operate the propane business and assets of Suburban Propane, a division of Quantum Chemical Corporation (the "Predecessor Company"). The Partnership completed an initial public offering of Common Units on March 5, 1996. In addition, Suburban Sales & Service, Inc. (the "Service Company"), a subsidiary of the Operating Partnership, was formed to acquire and operate the service work and appliance and parts businesses of the Predecessor Company. Also, Suburban Holdings, Inc., a subsidiary of the Operating Partnership, was formed on January 5, 2001 to hold the stock of Gas Connection, Inc., Suburban @ Home, Inc. and Suburban Franchising, Inc. Gas Connection, Inc. sells and installs natural gas and propane gas grills, fireplaces and related accessories and supplies; Suburban @ Home, Inc. operates a heating and air conditioning business and Suburban Franchising, Inc. creates and develops propane related franchising business opportunities. The Partnership, the Operating Partnership, the Service Company, Suburban Holdings, Inc. and its subsidiaries are collectively referred to hereinafter as the "Partnership Entities". On May 26, 1999, the Partnership completed a recapitalization (the "Recapitalization") which included the redemption of all limited partner interests held by the former general partner, Suburban Propane GP, Inc., a wholly-owned indirect subsidiary of Millennium Chemicals, Inc., and the substitution of a new general partner, Suburban Energy Services Group LLC, which is owned by senior management of the Partnership. 2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -------------------------------------------------------------------- BASIS OF PRESENTATION. The condensed consolidated financial statements include the accounts of the Partnership Entities. All significant intercompany transactions and accounts have been eliminated. The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. They include all adjustments which the Partnership considers necessary for a fair statement of the results for the interim period presented. Such adjustments consisted only of normal recurring items unless otherwise disclosed. These financial statements should be read in conjunction with the Partnership's Annual Report on Form 10-K for the fiscal year ended September 30, 2000, including management's discussion of financial results contained therein. Due to the seasonal nature of the Partnership's propane business, the results of operations for interim periods are not necessarily indicative of the results to be expected for a full year. FISCAL PERIOD. The Partnership's fiscal periods end on the Saturday nearest the end of the quarter. 8
USE OF ESTIMATES. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. DERIVATIVE INSTRUMENTS. The Partnership routinely uses propane futures and forward contracts to reduce the risk of future price fluctuations and to help ensure supply during periods of high demand. Effective October 1, 2000, the date of adoption of a new accounting pronouncement for derivative instruments, management determined that the Partnership's derivative instruments do not qualify as hedges. Accordingly, such contracts are recorded as assets or liabilities based on their fair value and any subsequent changes in the fair values of such contracts are recorded in income. These amounts are included in other current assets, other current liabilities and operating expenses, respectively. For the nine months ended June 30, 2001, the Partnership recorded an unrealized loss of $3,351, representing the net change in the fair values of the Partnership's derivatives during that period. See "Adoption of New Accounting Standard" for further information. INVENTORIES. Inventories are stated at the lower of cost or market. Cost is determined using a weighted average method for propane and a standard cost basis for appliances, which estimates average cost. PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are stated at cost. Depreciation of property, plant and equipment is computed using the straight-line method over the estimated service lives, which range from three to forty years. Accumulated depreciation at June 30, 2001 and September 30, 2000 was $210,949 and $198,549, respectively. GOODWILL AND OTHER INTANGIBLE ASSETS. Goodwill and other intangible assets are comprised of the following: June 30, 2001 September 30, 2000 ------------- ------------------ Goodwill $296,224 $296,201 Debt origination costs 8,024 8,024 Deferred credit agreement costs 1,753 3,123 Other, principally noncompete agreements 4,540 4,940 -------- -------- 310,541 312,288 Less: Accumulated amortization 55,836 50,671 -------- -------- $254,705 $261,617 ======== ======== 9
INCOME TAXES. As discussed in Note 1, the Partnership Entities consist of two limited partnerships, the Partnership and the Operating Partnership, and five corporate entities. For federal and state income tax purposes, the earnings attributed to the Partnership and the Operating Partnership are included in the tax returns of the individual partners. As a result, no recognition of income tax expense has been reflected in the Partnership's condensed consolidated financial statements relating to the earnings of the Partnership and the Operating Partnership. The earnings attributed to the corporate entities are subject to federal and state income taxes. Accordingly, the Partnership's condensed consolidated financial statements reflect income tax expense related to the corporate entities' earnings. UNIT-BASED COMPENSATION. The Partnership accounts for Unit-based compensation in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations, and makes the pro forma information disclosures required under the provisions of Statement of Financial Accounting Standard ("SFAS") No. 123, "Accounting for Stock-Based Compensation". Upon issuance of Units under the compensation plans, unearned compensation equivalent to the market value of the Restricted Units granted under the restricted unit plans, or Common Units granted under the Compensation Deferral Plan (the "Deferral Plan"), is charged at the date of grant. The unearned compensation is amortized ratably over the restricted periods. The unamortized unearned compensation value is shown as a reduction of partners' capital in the accompanying condensed consolidated balance sheets. As a result of the May 26, 1999 Recapitalization, all unamortized compensation related to the Restricted Units, issued under the 1996 Restricted Unit Award Plan, was earned and expense of $11,393 was recorded. As of June 30, 2001, no Units were outstanding under the 1996 Restricted Unit Award Plan, 42,925 Common Units were outstanding under the Deferral Plan and 48,960 Restricted Units were outstanding under the 2000 Restricted Unit Plan. See Notes 6 and 7 for further information. NET INCOME (LOSS) PER UNIT. Basic net income (loss) per limited partner Unit is computed by dividing net income (loss), after deducting the General Partner's approximate 2% interest, by the weighted average number of outstanding Common Units. Diluted net income (loss) per limited partner Unit is computed by dividing net income (loss), after deducting the General Partner's approximate 2% interest, by the weighted average number of outstanding Common Units, time vested Restricted Units granted under the 2000 Restricted Unit Plan and time vested Common Units granted under the Deferral Plan. ADOPTION OF NEW ACCOUNTING STANDARD. Effective with the first fiscal quarter of 2001, the Partnership adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") as amended by SFAS No. 137 and SFAS No. 138. SFAS 133 requires entities to record derivatives as assets or liabilities on the balance sheet based on their fair value with any subsequent changes in the fair values of contracts recorded in income, unless the contracts qualify as hedges. Contracts qualifying for hedge accounting would have changes in fair values reported as a component of comprehensive income (equity). Based on the criteria set forth in SFAS 133, management determined that the Partnership's derivative contracts do not qualify for hedge accounting and its derivatives are marked-to-market through income. The fair market value of the Partnership's derivative portfolio on the date of adoption did not reflect any unrealized net gain or loss and accordingly, no cumulative effect of this change in accounting is reflected in the accompanying condensed consolidated financial statements. 10
RECENTLY ISSUED ACCOUNTING STANDARDS. In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations" ("SFAS 141"), and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). Under the provisions of SFAS 141, all business combinations initiated after June 30, 2001 are required to be accounted for under the purchase method of accounting. Under the provisions of SFAS 142, goodwill will no longer be amortized but will be subject to a transitional impairment review and to annual impairment reviews in accordance with the SFAS. SFAS 142 is effective for fiscal years beginning after December 15, 2001, but early adoption is permitted for companies with a fiscal year beginning after March 15, 2001. The Partnership is currently in the process of evaluating the impact SFAS 142 will have on the consolidated financial position and consolidated results of operations of the Partnership. RECLASSIFICATIONS. Certain prior period balances have been reclassified to conform to the current period presentation. 3. DISTRIBUTIONS OF AVAILABLE CASH ------------------------------- The Partnership makes distributions to its partners 45 days after the end of each fiscal quarter in an aggregate amount equal to its Available Cash for such quarter. Available Cash generally means all cash on hand at the end of the fiscal quarter less the amount of cash reserves established by the Board of Supervisors in its reasonable discretion for future cash requirements. The agreement the Partnership made in connection with its Recapitalization to maintain certain levels of committed availability under its Credit Agreement to support the Minimum Quarterly Distribution expired on March 31, 2001. 4. COMMITMENTS AND CONTINGENCIES ----------------------------- The Partnership leases certain property, plant and equipment for various periods under noncancelable leases. Rental expense under operating leases was $17,818 and $14,797 for the nine months ended June 30, 2001 and June 24, 2000, respectively. The Partnership effectively is self-insured for general and product, workers' compensation and automobile liabilities up to predetermined amounts above which third party insurance applies. At June 30, 2001 and September 30, 2000, accrued insurance liabilities amounted to $26,120 and $25,628, respectively, representing the total estimated losses under these self-insurance programs. These liabilities represent the gross estimated losses as no claims or lawsuits, individually or in the aggregate, were estimated to exceed the Partnership's deductibles on its insurance policies. The Partnership is also involved in various legal actions that have arisen in the normal course of business including those relating to commercial transactions and product liability. Management believes that the ultimate resolution of these matters will not have a material adverse effect on the Partnership's financial position or future results of operations, after considering its self-insured liability for known and unasserted claims. 11
5. LONG-TERM DEBT AND REVOLVING CREDIT AGREEMENT --------------------------------------------- On March 5, 1996, the Operating Partnership issued $425,000 of Senior Notes with an annual interest rate of 7.54%. The Operating Partnership's obligations under the Senior Note Agreement are unsecured and rank on an equal and ratable basis with the Operating Partnership's obligations under the Revolving Credit Agreement discussed below. The Senior Notes will mature June 30, 2011. The Note Agreement requires that the principal be paid in equal annual installments of $42,500 starting June 30, 2002. At June 30, 2001, the Revolving Credit Agreement, as amended on January 29, 2001, consists of a $50,000 acquisition facility and a $75,000 working capital facility. Borrowings under the Revolving Credit Agreement, which expires on May 31, 2003, bear interest at a rate based upon either LIBOR plus a margin, First Union National Bank's prime rate or the Federal Funds rate plus 1/2 of 1%. An annual fee ranging from .375% to .50%, based upon certain financial tests, is payable quarterly whether or not borrowings occur. As of June 30, 2001, the fee was .50%. As of June 30, 2001, $46,000 was outstanding under the acquisition facility resulting from the acquisition of SCANA and no amount was outstanding under the working capital facility. As of September 30, 2000, $90,000 was outstanding under the acquisition facility and $6,500 was outstanding under the working capital facility. The Senior Note Agreement and Revolving Credit Agreement contain various restrictive and affirmative covenants applicable to the Operating Partnership, including (i) maintenance of certain financial tests, (ii) restrictions on the incurrence of additional indebtedness, and (iii) restrictions on certain liens, investments, guarantees, loans, advances, payments, mergers, consolidations, distributions, sales of assets and other transactions. 6. COMPENSATION DEFERRAL PLAN -------------------------- Effective May 26, 1999, in connection with the Partnership's Recapitalization, the Partnership adopted the Deferral Plan which provided for eligible employees of the Partnership to surrender their right to receive all or a portion of their unvested Common Units granted under the Partnership's 1996 Restricted Unit Award Plan prior to the time their Common Units were substantially certain to vest in exchange for the right to participate in and receive certain payments under the Deferral Plan. Senior management of the Partnership surrendered 553,896 Restricted Units representing substantially all of their Restricted Units, before they vested in exchange for the right to participate in the Deferral Plan. The Partnership deposited into a trust on behalf of these individuals 553,896 Common Units. The Deferral Plan also allows eligible employees to defer receipt of Common Units that may be subsequently granted by the Partnership under the Deferral Plan. The Common Units granted under the Deferral Plan and related Partnership distributions are subject to forfeiture provisions such that (a) 100% of the Common Units would be forfeited if the grantee ceases to be employed by the Partnership within three years of the date of the Recapitalization, (b) 75% would be forfeited if the grantee ceases to be employed after the third anniversary, but prior to the fourth anniversary of the Recapitalization date and (c) 50% would be forfeited if the grantee ceases to be employed 12
after the fourth anniversary, but prior to the fifth anniversary. Upon issuance of Common Units under the Deferral Plan, unearned compensation equivalent to the market value of the Common Units is charged at the date of grant. The unearned compensation is amortized in accordance with the Deferral Plan's forfeiture provisions. The unamortized unearned compensation value is shown as a reduction of partners' capital in the accompanying condensed consolidated balance sheets. During the nine months ended June 30, 2001, the Partnership amortized $169 of unearned compensation. Following is a summary of units outstanding in the Deferral Plan: Units Value Per Unit ------- -------------- Outstanding, September 30, 2000 and June 30, 2001 42,925 $19.91 ====== ====== Pursuant to the Deferral Plan, participants have deferred receipt of these Common Units and related distributions by the Partnership by depositing the Units into a trust. The value of the Common Units deposited in the trust and the related deferred compensation trust liability are reflected in the accompanying condensed consolidated balance sheets as components of partners' capital. 7. 2000 Restricted Unit Plan ------------------------- In November 2000, the Partnership adopted the Suburban Propane Partners, L.P. 2000 Restricted Unit Plan (the "2000 Restricted Unit Plan") which authorizes the issuance of Common Units with an aggregate value of $10,000 (487,804 Common Units valued at the initial public offering price of $20.50 per Unit) to executives, managers and other employees of the Partnership. Restricted Units issued under the 2000 Restricted Unit Plan vest over time with 25% of such units vesting at the end of each of the third and fourth anniversaries of the issuance date and the remaining 50% of such units vesting at the end of the fifth anniversary of the issuance date. 2000 Restricted Unit Plan participants are not eligible to receive quarterly distributions or vote their respective Restricted Units until vested. Restrictions also limit the sale or transfer of the Units during the restricted periods. The value of the Restricted Unit is established by the market price of the Common Unit at the date of grant. Restricted Units are subject to forfeiture in certain circumstances as defined in the 2000 Restricted Unit Plan. During the nine months ended June 30, 2001, the Partnership amortized $165 of unearned compensation associated with the 2000 Restricted Unit Plan. Following is a summary of activity in the 2000 Restricted Unit Plan: Units Value Per Unit ------- -------------- Outstanding, September 30, 2000 - $ - Awarded 78,228 $20.66 Forfeited (29,268) $20.66 ------- ------ Outstanding, June 30, 2001 48,960 $20.66 ======= ====== 13
8. Public Offering --------------- In the first quarter of fiscal 2001, the Partnership sold 2,352,700 Common Units in a public offering at a price of $21.125 per Unit realizing proceeds of $47,079, net of underwriting commissions and other offering expenses, all of which was applied to reduce outstanding borrowings under the Partnership's Revolving Credit Agreement. This transaction increased the total number of Common Units outstanding to 24,631,287. 9. Subsequent Events ----------------- On July 26, 2001, the Partnership announced a quarterly distribution of $.55 per Common Unit for the third quarter of fiscal 2001 consisting of the Minimum Quarterly Distribution of $.50 per Common Unit and an additional distribution of $.05 per Common Unit payable on August 14, 2001 to holders of record on August 6, 2001. 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS - ----------------------------------------------- This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, relating to the Partnership's future business expectations and predictions and financial condition and results of operations. These forward-looking statements involve certain risks and uncertainties. Important factors that could cause actual results to differ materially from those discussed in such forward-looking statements ("cautionary statements") include, among other things: the impact of weather conditions on the demand for propane; fluctuations in the unit cost of propane; the ability of the Partnership to compete with other suppliers of propane and other energy sources; the ability of the Partnership to retain and acquire customers; the Partnership's ability to implement its expansion strategy and to integrate acquired businesses successfully; the impact of energy efficiency and technology advances on the demand for propane; the ability of management to continue to control expenses; the impact of regulatory developments on the Partnership's business; and the impact of legal proceedings on the Partnership's business. All subsequent written and oral forward-looking statements attributable to the Partnership or persons acting on its behalf are expressly qualified in their entirety by such cautionary statements. THREE MONTHS ENDED JUNE 30, 2001 - -------------------------------- COMPARED TO THREE MONTHS ENDED JUNE 24, 2000 - -------------------------------------------- REVENUES Revenues decreased 6.9% or $10.7 million to $143.3 million for the three months ended June 30, 2001 compared to $154.0 million for the three months ended June 24, 2000. The overall decrease is primarily attributable to a decrease in retail gallons sold due to warmer weather occurring at the beginning of the quarter. In addition, the Partnership believes that this decrease is partially due to customer conservation efforts in response to higher propane selling prices resulting from increased propane product costs. Propane sold to retail customers decreased 6.6% or 6.4 million gallons to 90.1 million gallons, compared to 96.5 million gallons in the prior period's quarter. Sales prices averaged approximately 12% higher during the three months ended June 30, 2001 as compared to the prior period's quarter. Temperatures nationwide were 14% warmer than normal during the three month period as compared to 5% warmer than normal in the prior year period. Wholesale gallons sold and gallons sold related to price risk management activities decreased 82.4% or 39.0 million gallons to 8.3 million gallons, principally resulting from decreased market opportunities attributable to the high propane cost and limited supply environment, as compared to the prior period's quarter. OPERATING EXPENSES Operating expenses increased 19.8% or $10.5 million to $63.4 million for the three months ended June 30, 2001 compared to $52.9 million for the three months ended June 24, 2000. The increase in operating expenses is principally attributable to a $5.1 million unrealized loss under SFAS 133 representing the net change in the fair values of the Partnership's derivatives during the quarter, increased payroll and benefit costs, including increased compensation accruals associated with field incentive programs, and higher provisions for bad debts resulting from the increases in selling prices. 15
GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses decreased 22.4% or $1.5 million to $5.1 million for the three months ended June 30, 2001 compared to $6.6 million for the three months ended June 24, 2000. The decrease is primarily attributable to gains realized in the current quarter associated with the sales of non-strategic assets and a corporate investment. (LOSS) BEFORE INTEREST EXPENSE AND INCOME TAXES AND EBITDA (Loss) before interest expense and income taxes increased $5.1 million to $(5.5) million in the three months ended June 30, 2001 compared to $(0.4) million in the prior year's third quarter. EBITDA decreased $5.5 million or 58.5% to $3.9 million. These changes in (loss) before interest expense and income taxes and in EBITDA are primarily attributable to the $5.1 million net unrealized loss recorded under the provisions of SFAS 133 in the current quarter. Increased gross profit of $3.5 million, associated with higher per gallon margins and lower general and administrative expenses of $1.5 million were offset by increased operating expenses of $5.4 million excluding the SFAS 133 unrealized loss noted above. EBITDA should not be considered as an alternative to net income (as an indicator of operating performance) or as an alternative to cash flow (as a measure of liquidity or ability to service debt obligations) and is not in accordance with or superior to generally accepted accounting principles but provides additional information for evaluating the Partnership's ability to distribute the Minimum Quarterly Distribution. Because EBITDA excludes some, but not all, items that affect net income and this measure may vary among companies, the EBITDA data presented above may not be comparable to similarly titled measures of other companies. INTEREST EXPENSE Net interest expense decreased $1.3 million or 13.0% to $8.9 million for the three months ended June 30, 2001 compared to $10.2 million in the prior period's quarter. This decrease is primarily attributable to lower outstanding borrowings under the revolving credit agreement associated with the paydown of the acquisition facility. NINE MONTHS ENDED JUNE 30, 2001 - ------------------------------- COMPARED TO NINE MONTHS ENDED JUNE 24, 2000 - ------------------------------------------- REVENUES Revenues increased 22.4% or $144.7 million to $790.0 million for the nine months ended June 30, 2001 compared to $645.3 million for the nine months ended June 24, 2000. The overall increase is primarily attributable to higher propane costs resulting in higher sales prices to customers. Propane sold to retail customers increased 2.4% or 10.2 million gallons to 439.1 million gallons compared to 428.9 million gallons in the prior period. The increase in gallons is principally due to colder temperatures, which nationwide were 3% colder than normal during the nine month period as compared to 12% warmer than normal in the prior year period. The effect of colder temperatures was partially offset by customer conservation efforts resulting from the high cost of propane during 16
the current nine month period. Wholesale gallons sold and gallons sold related to price risk management activities decreased 31.9% or 59.6 million gallons to 127.2 million gallons, principally resulting from the high propane cost and limited supply environment during the current nine month period as compared to the prior year period. OPERATING EXPENSES Operating expenses increased 14.8% or $24.8 million to $192.4 million for the nine months ended June 30, 2001 compared to $167.6 million for the nine months ended June 24, 2000. The increase in operating expenses is principally attributable to increased payroll and benefit costs, including increased incentive compensation accruals in line with higher earnings, higher provisions for bad debts resulting from the increases in selling prices, higher insurance, increased vehicle fuel costs and unrealized losses recorded under the provisions of SFAS 133 related to changes in fair values of the Partnership's derivatives. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses increased 11.6% or $2.4 million to $22.6 million for the nine months ended June 30, 2001 compared to $20.2 million for the nine months ended June 24, 2000. The increase is primarily attributable to higher payroll and benefit costs, including incentive compensation accruals in line with higher earnings, increased costs for professional services and higher equipment leasing costs offset in part by gains realized on the sales of non-strategic assets and corporate investments. INCOME BEFORE INTEREST EXPENSE AND INCOME TAXES AND EBITDA Results for the nine month period ended June 30, 2000 include a $10.3 million gain from the sale of assets. Excluding this one-time item, income before interest expense and income taxes increased $28.5 million to $104.8 million in the nine months ended June 30, 2001 compared to $76.3 million in the prior year's comparable period. EBITDA, excluding the one-time item, increased $28.8 million or 27.4% to $133.9 million. The increases in income before interest expense and income taxes and in EBITDA are primarily attributable to higher gross profit of $56.0 million reflecting higher retail volumes and margins, partially offset by increased operating, general and administrative expenses. EBITDA should not be considered as an alternative to net income (as an indicator of operating performance) or as an alternative to cash flow (as a measure of liquidity or ability to service debt obligations) and is not in accordance with or superior to generally accepted accounting principles but provides additional information for evaluating the Partnership's ability to distribute the Minimum Quarterly Distribution. Because EBITDA excludes some, but not all, items that affect net income and this measure may vary among companies, the EBITDA data presented above may not be comparable to similarly titled measures of other companies. INTEREST EXPENSE Net interest expense decreased $0.7 million to $29.2 million in the nine months ended June 30, 2001 compared with $29.9 million in the prior period. The decrease is primarily attributable to lower outstanding borrowings under the revolving credit facility resulting from the paydown of the acquisition facility. 17
LIQUIDITY AND CAPITAL RESOURCES Due to the seasonal nature of the propane business, cash flows from operating activities are greater during the winter and spring seasons as customers pay for propane purchased during the heating season. For the nine months ended June 30, 2001, net cash provided by operating activities was $84.0 million compared to cash provided by operating activities of $47.6 million in the nine months ended June 24, 2000. The increase of $36.4 million was primarily due to higher net income, excluding the gain on sale of assets in the prior year period, and favorable changes in working capital reflecting collections on higher accounts receivable levels and increased incentive compensation accruals. Net cash used in investing activities was $12.1 million during the nine months ended June 30, 2001 consisting of capital expenditures of $16.1 million (including $4.5 million for maintenance expenditures and $11.6 million to support the growth of operations), offset by proceeds from the sales of property, plant and equipment of $4.0 million. Net cash used in investing activities was $92.4 million during the nine months ended June 30, 2000 consisting of acquisition payments of $98.0 million reflecting the SCANA acquisition and capital expenditures of $14.3 million (including $6.1 million for maintenance expenditures and $8.2 million to support the growth of operations), offset by proceeds from the sale of property, plant and equipment of $19.9 million, including 23 customer service centers. Net cash used in financing activities for the nine months ended June 30, 2001 was $45.2 million, reflecting $47.1 million in net proceeds received from the sale of Common Units in a public offering, offset by $50.9 million of net repayments of amounts outstanding under the Partnership's Revolving Credit Agreement utilizing the proceeds of the public offering, $0.7 million in costs incurred to amend the Revolving Credit Agreement and $40.7 million in Partnership distributions. Net cash provided by financing activities for the nine months ended June 24, 2000 was $48.3 million, principally reflecting borrowings to fund the SCANA acquisition and working capital borrowings partially offset by the Partnership's distribution. Effective January 29, 2001, the Partnership amended its Revolving Credit Agreement. Pursuant to the amendment, the acquisition facility has been reduced from $100.0 million to $50.0 million, the working capital facility has been retained at $75.0 million and both facilities have been extended until May 31, 2003. The minimum net worth covenant has been eliminated and the maximum leverage ratio has been reduced to 5.00 to 1 for quarters after March 31, 2001. Borrowings bear interest at a rate based upon either LIBOR plus a maximum margin of 2% or the agent bank's base rate plus a margin of 1% (in each case such margin to reduce according to improvements in the leverage ratio.) An annual fee of .50% (also subject to reduction according to improvements in the leverage ratio) is payable quarterly whether or not borrowings are made. The Partnership has announced that it will make a distribution of $.55 per Unit to its Common Unitholders on August 14, 2001 for the third fiscal quarter of 2001, consisting of the Minimum Quarterly Distribution of $.50 per Common Unit and an additional distribution of $.05 per Common Unit. 18
Under the terms of the Senior Note Agreement, the first annual principal installment of $42,500 is due on June 30, 2002. The Partnership intends to refinance such amount and has initiated discussions with various third parties to reach a refinancing agreement with favorable terms to the Partnership. Alternatively, the Partnership currently expects that it will generate sufficient funds from operations, or have available adequate borrowing capacity under its working capital facility, to make the principal payment. However, the Partnership cannot predict whether it will be successful in negotiating a favorable refinancing agreement, have adequate available borrowing capacity under its working capital facility or generate sufficient excess funds to meet the principal obligation. The ability of the Partnership to satisfy its future obligations will depend on its future performance, which will be subject to prevailing economic, financial, business and weather conditions and other factors, many of which are beyond its control. Based on its current cash position, available Credit Facilities and expected cash flow from operating activities, the Partnership expects to have sufficient funds to meet its obligations and working capital needs, and pay distributions at the current level, during the balance of fiscal 2001. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As of June 30, 2001, the Partnership was party to propane forward and option contracts with various third parties and futures traded on the New York Mercantile Exchange ("NYMEX"). Forward and futures contracts require that the Partnership sell or acquire propane at a fixed price at fixed future dates. An option contract allows, but does not require its holder to buy or sell propane at a specified price during a specified time period; the writer of an option contract must fulfill the obligation of the option contract, should the holder choose to exercise the option. At expiration, the contracts are settled by the delivery of propane to the respective party or are settled by the payment of a net amount equal to the difference between the then current price of propane and the fixed contract price. The contracts are entered into in anticipation of market movements and to manage and hedge exposure to fluctuating propane prices. Market risks associated with the trading of futures and forward contracts are monitored daily for compliance with the Partnership's trading policy which includes volume limits for open positions. Open inventory positions are reviewed and managed daily as to exposures to changing market prices. MARKET RISK The Partnership is subject to commodity price risk to the extent that propane market prices deviate from fixed contract settlement amounts. Futures contracts traded with brokers of the NYMEX require daily cash settlements in margin accounts. Forward and option contracts are generally settled at the expiration of the contract term. 19
CREDIT RISK Futures contracts are guaranteed by the NYMEX and as a result have minimal credit risk. The Partnership is subject to credit risk with forward and option contracts to the extent the counterparties do not perform. The Partnership evaluates the financial condition of each counterparty with which it conducts business and establishes credit limits to reduce exposure to credit risk of non-performance. SENSITIVITY ANALYSIS In an effort to estimate the exposure of unfavorable market price movements, a sensitivity analysis of open positions as of June 30, 2001 was performed. Based on this analysis, a hypothetical 10% adverse change in market prices for each of the future months for which an option, futures and/or forward contract exists indicates a potential loss in future earnings of $0.8 million as of June 30, 2001. See also Item 7A of the Partnership's Annual Report on Form 10-K for the fiscal year ended September 30, 2000. The above hypothetical change does not reflect the worst case scenario. Actual results may be significantly different depending on market conditions and the composition of the open position portfolio. 20
PART II OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Reports on Form 8-K None. 21
SIGNATURES Pursuant to the requirements of the Securities Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized: SUBURBAN PROPANE PARTNERS, L.P. Date: August 13, 2001 By /s/ Robert M. Plante --------------------------------- Robert M. Plante Vice President, Finance and Treasurer By /s/ Edward J. Grabowiecki --------------------------------- Edward J. Grabowiecki Vice President and Controller and Chief Accounting Officer 22