Financial Instruments and Risk Management

9 Months Ended

Jun. 25, 2011

Financial Instruments and Risk Management [Abstract]

Financial Instruments and Risk Management

3. Financial Instruments and Risk Management

Cash and Cash Equivalents.  The Partnership considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents.  The carrying amount approximates fair value because of the short maturity of these instruments.

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 Partnership's 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 anticipated future purchases of propane or fuel oil to be 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 Partnership's 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 Partnership's 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 contract's inception and on an ongoing basis, whether the hedge contract is highly effective in offsetting changes in cash flows of hedged items.  Changes in the fair value of derivative instruments designated as cash flow hedges are reported in 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 Partnership's borrowings bear interest at prevailing interest rates based upon, at the Operating Partnership's option, LIBOR plus an applicable margin or the base rate, defined as the higher of the Federal Funds Rate plus ½ of 1% or the agent bank's prime rate, or LIBOR plus 1%, plus the applicable margin.  The applicable margin is dependent on the level of the Partnership's 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 are 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.

The Partnership measures the fair value of its exchange-traded options and futures contracts using Level 1 inputs, the fair value of its interest rate swaps using Level 2 inputs and the fair value of its over-the-counter options contracts using Level 3 inputs.  The Partnership's over-the-counter options contracts are valued based on an internal option model.  The inputs utilized in the model are based on publicly available information as well as broker quotes.

The following summarizes the gross fair value of the Partnership's derivative instruments and their location in the condensed consolidated balance sheet as of June 25, 2011 and September 25, 2010, respectively:

	As of June 25, 2011			As of September 25, 2010
Asset Derivatives	Location	Fair Value		Location	Fair Value
Derivatives not designated as hedging instruments:
Commodity options	Other current assets	$	4,081	Other current assets	$	2,601
	Other assets		1,243	Other assets		-
Commodity futures	Other current assets		155	Other current assets		22
		$	5,479		$	2,623
Liability Derivatives	Location	Fair Value		Location	Fair Value
Derivatives designated as hedging instruments:
Interest rate swaps	Other current liabilities	$	2,709	Other current liabilities	$	2,740
	Other liabilities		2,296	Other liabilities		3,561
		$	5,005		$	6,301
Derivatives not designated as hedging instruments:
Commodity options	Other current liabilities	$	181	Other current liabilities	$	641
	Other liabilities		1,489	Other liabilities		-
Commodity futures	Other current liabilities		17	Other current liabilities		1,838
		$	1,687		$	2,479

The following summarizes the reconciliation of the beginning and ending balances of assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs:

	Fair Value Measurement Using Significant Unobservable Inputs (Level 3)
	Nine Months Ended June 25, 2011						Nine Months Ended June 26, 2010
	Assets			Liabilities			Assets			Liabilities
Beginning balance of over-the-counter options	$	1,509		$	29		$	1,675		$	844
Beginning balance realized during the period		(1,509	)		(29	)		(1,237	)		(844	)
Contracts purchased during the period		2,778			226			1,111			94
Change in the fair value of beginning balance		-			-			(427	)		-
Ending balance of over-the-counter options	$	2,778		$	226		$	1,122		$	94

As of June 25, 2011 and September 25, 2010, the Partnership's outstanding commodity-related derivatives had a weighted average maturity of approximately 6 months and 3 months, respectively.

The effect of the Partnership's derivative instruments on the condensed consolidated statement of operations for the three and nine months ended June 25, 2011 and June 26, 2010 are as follows:

	Three months ended June 25, 2011										Three months ended June 26, 2010
Derivatives in					Gains (Losses) Reclassified										Gains (Losses) Reclassified
Cash Flow	Gains (Losses)				from Accumulated OCI into						Gains (Losses)				from Accumulated OCI into
Hedging	Recognized in OCI				Income (Effective Portion)						Recognized in OCI				Income (Effective Portion)
Relationships	(Effective Portion)				Location			Amount			(Effective Portion)				Location		Amount
Interest rate swap		$	(1,077	)	Interest expense			$	(719	)		$	(1,892	)	Interest expense		$	(715	)
		$	(1,077	)				$	(719	)		$	(1,892	)			$	(715	)
Derivatives Not Designated as Hedging Instruments		Location of Gains (Losses) Recognized in Income			Amount of Unrealized Gains (Losses) Recognized in Income							Location of Gains (Losses) Recognized in Income			Amount of Unrealized Gains (Losses) Recognized in Income
Options		Cost of products sold			$	(516	)					Cost of products sold			$	212
Futures		Cost of products sold				203						Cost of products sold				69
					$	(313	)								$	281

	Nine months ended June 25, 2011								Nine months ended June 26, 2010
				Gains (Losses) Reclassified								Gains (Losses) Reclassified
Derivatives in Cash	Gains (Losses)			from Accumulated OCI into					Gains (Losses)			from Accumulated OCI into
Flow Hedging	Recognized in OCI			Income (Effective Portion)					Recognized in OCI			Income (Effective Portion)
Relationships	(Effective Portion)			Location		Amount			(Effective Portion)			Location			Amount
Interest rate swap	$	(851	)	Interest expense		$	(2,147	)	$	(3,775	)	Interest expense			$	(2,790	)
	$	(851	)			$	(2,147	)	$	(3,775	)				$	(2,790	)
Derivatives Not Designated as Hedging Instruments	Location of Gains (Losses) Recognized in Income			Amount of Unrealized Gains (Losses) Recognized in Income					Location of Gains (Losses) Recognized in Income			Amount of Unrealized Gains (Losses) Recognized in Income
Options	Cost of products sold			$	283				Cost of products sold			$	(1,068	)
Futures	Cost of products sold				1,954				Cost of products sold				(3,791	)
				$	2,237							$	(4,859	)

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 Partnership's 2020 senior notes was $261,250 and $269,375 as of June 25, 2011 and September 25, 2010, respectively.