-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AyLFzvRHbTy38dCVEx4pB2D4Lw2svaiVAZ2M0k96Ysq9TKld+iHmBFgqQcoF9/oD IbVftjgVGyl40BmW3jJK4Q== 0000950136-04-001510.txt : 20040511 0000950136-04-001510.hdr.sgml : 20040511 20040511161445 ACCESSION NUMBER: 0000950136-04-001510 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20040331 FILED AS OF DATE: 20040511 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUBURBAN PROPANE PARTNERS LP CENTRAL INDEX KEY: 0001005210 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-MISCELLANEOUS RETAIL [5900] IRS NUMBER: 223410353 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-14222 FILM NUMBER: 04796594 BUSINESS ADDRESS: STREET 1: P O BOX 206 STREET 2: 240 ROUTE 10 WEST CITY: WIPPANY STATE: NJ ZIP: 07981 BUSINESS PHONE: 9738875300 MAIL ADDRESS: STREET 1: ONE SUBURBAN PLZ STREET 2: 240 RTE 10 WEST CITY: WHIPPANY STATE: NJ ZIP: 07981 10-Q 1 file001.txt QUARTERLY REPORT ================================================================================ ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 27, 2004 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 (973) 887-5300 (Address, including zip code, and telephone number, including area code, of registrant's 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 [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ] As of May 3, 2004, there were 30,256,767 Common Units outstanding. ================================================================================ ================================================================================ SUBURBAN PROPANE PARTNERS, L.P. AND SUBSIDIARIES INDEX TO FORM 10-Q
PART I Page ---- ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) Condensed Consolidated Balance Sheets as of March 27, 2004 and September 27, 2003........................................................... 1 Condensed Consolidated Statements of Operations for the three months ended March 27, 2004 and March 29, 2003................................................ 2 Condensed Consolidated Statements of Operations for the six months ended March 27, 2004 and March 29, 2003................................................ 3 Condensed Consolidated Statements of Cash Flows for the six months ended March 27, 2004 and March 29, 2003................................................ 4 Condensed Consolidated Statement of Partners' Capital for the six months ended March 27, 2004................................................................... 5 Notes to Condensed Consolidated Financial Statements............................. 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................................... 16 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...................................................................... 29 ITEM 4. CONTROLS AND PROCEDURES.......................................................... 31 PART II ITEM 1. LEGAL PROCEEDINGS................................................................ 32 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................................. 32 Signatures...................................................................................... 33
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 relating to the Partnership's future business expectations and predictions and financial condition and results of operations. 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 ("Cautionary Statements"). The risks and uncertainties and their impact on the Partnership's operations include, but are not limited to, the following risks: o The impact of weather conditions on the demand for propane, fuel oil and other refined fuels; o Fluctuations in the unit cost of propane, fuel oil and other refined fuels; o The ability of the Partnership to compete with other suppliers of propane, fuel oil and other energy sources; o The impact on propane, fuel oil and other refined fuel prices and supply from the political, military and economic instability of the oil producing nations, global terrorism and other general economic conditions; o The ability of the Partnership to realize fully, or within the expected time frame, the expected cost savings and synergies from the acquisition of Agway Energy; o The ability of the Partnership to acquire and maintain reliable transportation for its propane, fuel oil and other refined fuels; o The ability of the Partnership to retain customers; o The impact of energy efficiency and technology advances on the demand for propane and fuel oil; o The ability of management to continue to control expenses; o The impact of changes in applicable statutes and government regulations, or their interpretations, including those relating to the environment and global warming and other regulatory developments on the Partnership's business; o The impact of legal proceedings on the Partnership's business; o The Partnership's ability to implement its expansion strategy into new business lines and sectors; and o The Partnership's ability to integrate acquired businesses successfully. Some of these Forward-Looking Statements are discussed in more detail in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Quarterly Report. On different occasions, the Partnership or its representatives have made or may make Forward-Looking Statements in other filings that the Partnership makes with the Securities and Exchange Commission (the "SEC"), in the press releases or in oral statements made by or with the approval of one of its authorized executive officers. Readers are cautioned not to place undue reliance on Forward-Looking or Cautionary Statements, which reflect management's opinions only as of the date made. The Partnership undertakes no obligation to update any Forward-Looking or Cautionary Statement. 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)
MARCH 27, SEPTEMBER 27, 2004 2003 ----------- ----------- ASSETS Current assets: Cash and cash equivalents $ 61,426 $ 15,765 Accounts receivable, less allowance for doubtful accounts of $6,358 and $2,519, respectively 167,720 36,437 Inventories 60,682 41,510 Prepaid expenses and other current assets 32,105 5,200 ----------- ----------- Total current assets 321,933 98,912 Property, plant and equipment, net 414,425 312,790 Goodwill and indefinite lived intangible assets 285,610 243,236 Other intangible assets, net 28,050 1,035 Other assets 21,372 9,657 ----------- ----------- Total assets $ 1,071,390 $ 665,630 =========== =========== LIABILITIES AND PARTNERS' CAPITAL Current liabilities: Accounts payable $ 50,751 $ 26,204 Accrued employment and benefit costs 35,001 20,798 Current portion of long-term borrowings 42,908 42,911 Accrued insurance 10,763 7,810 Customer deposits and advances 26,384 23,958 Accrued interest 10,608 7,457 Other current liabilities 18,697 8,575 ----------- ----------- Total current liabilities 195,112 137,713 Long-term borrowings 515,915 340,915 Postretirement benefits obligation 33,332 33,435 Accrued insurance 16,399 20,829 Accrued pension liability 45,233 42,136 Other liabilities 13,315 6,524 ----------- ----------- Total liabilities 819,306 581,552 ----------- ----------- Commitments and contingencies Partners' capital: Common Unitholders (30,257 and 27,256 units issued and outstanding at March 27, 2004 and September 27, 2003, respectively) 332,433 165,950 General Partner 3,789 1,567 Deferred compensation (5,954) (5,795) Common Units held in trust, at cost 5,954 5,795 Unearned compensation (4,766) (2,171) Accumulated other comprehensive loss (79,372) (81,268) ----------- ----------- Total partners' capital 252,084 84,078 ----------- ----------- Total liabilities and partners' capital $ 1,071,390 $ 665,630 =========== ===========
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)
THREE MONTHS ENDED --------------------------- MARCH 27, MARCH 29, 2004 2003 --------- --------- Revenues Propane and refined fuels $463,512 $266,423 Other 111,066 21,231 --------- --------- 574,578 287,654 Costs and expenses Cost of products sold 346,736 142,231 Operating 109,840 64,709 General and administrative 17,392 10,149 Restructuring costs 2,179 -- Depreciation and amortization 9,223 6,800 --------- --------- 485,370 223,889 Income before interest expense and provision for income taxes 89,208 63,765 Interest expense, net 10,770 8,876 --------- --------- Income before provision for income taxes 78,438 54,889 Provision for income taxes 83 37 --------- --------- Income from continuing operations 78,355 54,852 Discontinued operations (Note 12): Gain on sale of customer service centers 14,205 2,404 Income from discontinued customer service centers -- 1,050 --------- --------- Net income $ 92,560 $ 58,306 ========= ========= General Partner's interest in net income $ 2,616 $ 1,484 --------- --------- Limited Partners' interest in net income $ 89,944 $ 56,822 ========= ========= Income per Common Unit - basic Income from continuing operations $ 2.52 $ 2.17 Discontinued operations 0.45 0.14 --------- --------- Net income $ 2.97 $ 2.31 --------- --------- Weighted average number of Common Units outstanding - basic 30,257 24,631 --------- --------- Income per Common Unit - diluted Income from continuing operations $ 2.51 $ 2.16 Discontinued operations 0.45 0.14 --------- --------- Net income $ 2.96 $ 2.30 --------- --------- Weighted average number of Common Units outstanding - diluted 30,372 24,692 --------- ---------
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)
SIX MONTHS ENDED ------------------------- March 27, March 29, 2004 2003 --------- --------- Revenues Propane and refined fuels $650,712 $439,730 Other 144,535 47,164 --------- --------- 795,247 486,894 Costs and expenses Cost of products sold 457,035 234,712 Operating 172,594 123,234 General and administrative 27,894 19,170 Restructuring costs 2,179 -- Depreciation and amortization 16,452 13,773 --------- --------- 676,154 390,889 Income before interest expense and provision for income taxes 119,093 96,005 Interest expense, net 20,481 17,732 --------- --------- Income before provision for income taxes 98,612 78,273 Provision for income taxes 166 167 --------- --------- Income from continuing operations 98,446 78,106 Discontinued operations (Note 12): Gain on sale of customer service centers 14,205 2,404 Income from discontinued customer service centers -- 1,050 --------- --------- Net income $112,651 $ 81,560 ========= ======== General Partner's interest in net income $ 3,124 $ 2,075 --------- --------- Limited Partners' interest in net income $109,527 $ 79,485 ========= ======== Income per Common Unit - basic Income from continuing operations $ 3.31 $ 3.09 Discontinued operations 0.47 0.14 --------- --------- Net income $ 3.78 $ 3.23 --------- --------- Weighted average number of Common Units outstanding - basic 28,942 24,631 --------- --------- Income per Common Unit - diluted Income from continuing operations $ 3.29 $ 3.08 Discontinued operations 0.48 0.14 --------- --------- Net income $ 3.77 $ 3.22 --------- --------- Weighted average number of Common Units outstanding - diluted 29,053 24,688 --------- ---------
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)
SIX MONTHS ENDED --------------------------- March 27, March 29, 2004 2003 --------- --------- Cash flows from operating activities: Net income $ 112,651 $ 81,560 Adjustments to reconcile net income to net cash provided by operations: Depreciation expense 15,520 13,543 Amortization of intangible assets 932 230 Amortization of debt origination costs 621 711 Amortization of unearned compensation 584 419 Gain on disposal of property, plant and equipment, net (161) (320) Gain on sale of customer service centers (14,205) (2,404) Changes in assets and liabilities, net of acquisition: (Increase) in accounts receivable (66,431) (57,795) (Increase)/decrease in inventories (6,681) 913 (Increase) in prepaid expenses and other current assets (11,847) (3,031) Increase in accounts payable 7,690 5,723 Increase/(decrease) in accrued employment and benefit costs 7,973 (2,397) Increase in accrued interest 3,151 8 (Decrease) in other accrued liabilities (25,365) (16,624) (Increase) in other noncurrent assets (928) (551) (Decrease)/increase in other noncurrent liabilities (170) 3,381 --------- --------- Net cash provided by operating activities 23,334 23,366 --------- --------- Cash flows from investing activities: Capital expenditures (12,857) (6,041) Aquisition of Agway Energy, net of cash acquired (211,181) -- Proceeds from sale of property, plant and equipment 429 1,061 Proceeds from sale of customer service centers, net 23,969 5,654 --------- --------- Net cash (used in)/provided by investing activities (199,640) 674 --------- --------- Cash flows from financing activities: Long-term debt repayments -- (59) Long-term debt issuance 175,000 -- Expenses associated with debt agreements (5,908) -- Net proceeds from issuance of Common Units 87,566 -- Partnership distributions (34,691) (29,065) --------- --------- Net cash provided by/(used in) financing activities 221,967 (29,124) --------- --------- Net increase/(decrease) in cash and cash equivalents 45,661 (5,084) Cash and cash equivalents at beginning of period 15,765 40,955 --------- --------- Cash and cash equivalents at end of period $ 61,426 $ 35,871 ========= =========
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)
Accumulated Number of Common Other Total Common Common General Deferred Units in Unearned Comprehensive Partners' Comprehensive Units Unitholders Partner Compensation Trust Compensation (Loss) Capital Income ---------- ----------- ------- ------------ -------- ------------ ------------ --------- ------------ Balance at September 27, 2003 27,256 $ 165,950 $ 1,567 $ (5,795) $ 5,795 $ (2,171) $ (81,268) $ 84,078 Net income 109,527 3,124 112,651 $ 112,651 Other comprehensive loss: Net unrealized gains on cash flow hedges 6,403 6,403 6,403 Reclassification of realized gains on cash flow hedges into earnings (4,507) (4,507) (4,507) --------- Comprehensive income $ 114,547 ========= Partnership distributions (33,789) (902) (34,691) Sale of Common Units under public offering, net of expenses 2,990 87,566 87,566 Common Units issued under Restricted Unit Plan 11 - Common Units distributed into trust (159) 159 - Grants issued under Restricted Unit Plan, net of forfeitures 3,179 (3,179) - Amortization of Restricted Unit Plan, net of forfeitures 584 584 ------- --------- -------- -------- -------- --------- --------- ---------- Balance at March 27, 2004 30,257 $ 332,433 $ 3,789 $ (5,954) $ 5,954 $ (4,766) $ (79,372) $252,084 ======= ========= ======== ======== ======== ========= ========= ==========
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. BASIS OF PRESENTATION PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the accounts of Suburban Propane Partners, L.P. (the "Partnership"), its partner and its direct and indirect subsidiaries. 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 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 Partnership's Annual Report on Form 10-K for the fiscal year ended September 27, 2003, including management's discussion and analysis of financial condition and results of operations contained therein. Due to the seasonal nature of the Partnership's 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 Partnership's fiscal periods end on the Saturday nearest the end of the quarter. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. The Partnership enters into a combination of exchange-traded futures and option contracts, forward contracts and in certain instances, over-the-counter options (collectively "derivative instruments") to manage the price risk associated with future purchases of the commodities used in its operations, principally propane and heating oil, as well as to ensure supply during periods of high demand. All derivative instruments are reported on the balance sheet, within other current assets or other current liabilities, at their fair values pursuant to Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 138 and No. 149 ("SFAS 133"). On the date that futures, forward and option contracts are entered into, 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/(loss) ("OCI"), depending on whether a derivative instrument is designated as a hedge and, if it is, 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 hedges are recorded in current period earnings within operating expenses. A portion of the Partnership's option contracts are not classified as hedges and, as such, changes in the fair value of these derivative instruments are recognized within operating expenses as they occur. At March 27, 2004, the fair value of derivative instruments described above resulted in derivative assets of $5,374 included within prepaid expenses and other current assets and derivative liabilities of $491 included within other current liabilities. Operating expenses include unrealized (non-cash) gains in the amount of $1,094 for the three months ended March 27, 2004 and unrealized losses in the amount of $352 for the three months ended March 29, 2003, attributable to the change in fair value of derivative instruments not designated as hedges. Operating expenses include unrealized (non-cash) gains in the amount of $301 for the six months ended March 27, 2004 and unrealized losses in the amount of $1,376 for the six months ended March 29, 2003, attributable to the change in fair value of derivative instruments not designated as hedges. At March 27, 2004, unrealized gains on derivative instruments designated as cash flow hedges in the amount of $767 were included in OCI and are expected to be recognized in earnings during the next 12 months as the hedged transactions occur. However, due to the volatility of the commodities market, the corresponding value in OCI is subject to change prior to its impact on earnings. 6 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. Estimates have been made by management in the areas of insurance and litigation reserves, environmental reserves, pension and other postretirement benefit liabilities and costs, valuation of derivative instruments, asset valuation assessment, 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. 2. ACQUISITION OF AGWAY ENERGY On December 23, 2003, 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") for $206,000 in cash, subject to certain purchase price adjustments, pursuant to an asset purchase agreement dated November 10, 2003 between the Operating Partnership and Agway, Inc. (the "Acquisition"). Agway Energy, based in Syracuse, New York, is a leading regional marketer of propane, fuel oil, gasoline and diesel fuel primarily in New York, Pennsylvania, New Jersey and Vermont. To complement its core marketing and delivery business, Agway Energy also installs and services a wide variety of home comfort equipment, particularly in the areas of heating, ventilation and air conditioning. The Acquisition was consistent with the Partnership's business strategy of prudently pursuing acquisitions of retail propane distributors and other energy-related businesses that can complement or supplement its core propane operations and also expanded our presence in the northeast energy market. During the second quarter of fiscal 2004, the Partnership and Agway, Inc. agreed upon the amount of working capital acquired in the Acquisition in accordance with the Purchase and Sale Agreement and, as a result, the Partnership received a purchase price adjustment in the amount of $945 from Agway, Inc. Additionally, in connection with the Acquisition, the Partnership negotiated non-compete agreements with certain members of the management of Agway Energy resulting in a cash payment in the amount of $2,650. Accordingly, the total cost of the Acquisition, including approximately $3,500 in transaction related costs, was approximately $211,205. The Acquisition was financed through net proceeds of $87,566 from the issuance of 2,990,000 Common Units in December 2003 (see Note 11) with the remainder funded by a portion of the net proceeds from the offering of unsecured 6.875% senior notes (see Note 6). The results of Agway Energy have been included in the Partnership's consolidated financial statements from the date of the Acquisition. Given the size and complexity of the Acquisition, a final determination of purchase accounting adjustments, including the allocation of the purchase price to the assets acquired and liabilities assumed based on their respective fair values, has not yet been finalized. As of March 27, 2004, the cost of the Acquisition has been preliminarily allocated to the assets acquired and liabilities assumed according to estimated fair values and is subject to adjustment when additional information concerning asset and liability valuations is finalized. 7 The total cost of the Acquisition has been preliminarily allocated as follows: Net current assets $ 28,790 Property, plant and equipment 111,665 Intangible assets 28,045 Goodwill 43,330 Other assets, principally environmental escrow asset 8,500 Deferred tax assets 20,022 Deferred tax asset valuation allowance (20,022) Severance and other restructuring costs (625) Environmental reserve (8,500) --------- Total cost of Acquisition $ 211,205 ========= Property, plant and equipment. The fair value of acquired property, plant and equipment, including land, buildings, storage equipment, vehicles, tanks and cylinders and computer equipment is based upon their respective value-in-use, unless there was a known plan to dispose of an asset. Assets to be disposed of or otherwise abandoned were not assigned a value. Additional adjustments to the fair value of property, plant and equipment acquired may be recorded as the Partnership further refines its plans to integrate the operations of Agway Energy. Intangible assets. The Partnership is finalizing a valuation of the fair value of identifiable intangible assets. Based on the preliminary valuation, identifiable intangible assets include the fair value of customer lists of $19,865, trade names of $3,513, non-compete agreements of $2,700 and below market lease arrangements of $1,967. The values assigned to customer lists and trade names are being amortized on a straight-line basis over a period of 15 years. The non-compete agreements are being amortized on a straight-line basis over the non-compete period ranging from one to two years and the value assigned to the lease arrangements is being amortized over the remaining 21-year lease term. Goodwill. In accordance with the requirements of SFAS No. 142, "Goodwill and Other Intangible Assets," the residual goodwill and acquired indefinite-lived intangible assets related to the $6,800 value assigned to the assembled workforce will not be amortized. Such goodwill and intangible assets are deductible for tax purposes. Environmental escrow asset and reserves. The Partnership acquired certain surplus properties with either known or probable environmental exposure, some of which are currently in varying stages of investigation, remediation or monitoring. Additionally, the Partnership identified that certain active sites acquired contained environmental exposures which may require further investigation, future remediation or ongoing monitoring activities. Based on the Partnership's current best estimate of future costs for environmental investigations, remediation and ongoing monitoring activities associated with acquired properties with either known or probable environmental exposures an environmental reserve in the amount of $8,500 has been established in purchase accounting. Under the Purchase and Sale Agreement, Agway, Inc. has set aside $15,000 from the total purchase price in a separate escrow account to fund any future environmental costs and expenses. Accordingly, in the preliminary allocation of the purchase price, the Partnership established a corresponding environmental escrow asset in the amount of $8,500 related to the future reimbursement from escrowed funds for environmental spending. Under the terms of the Purchase and Sale Agreement, the escrowed funds will be used to fund environmental costs and expenses during the first three years following the closing date of the Acquisition. Subject to amounts withheld with respect to any pending claims made prior to the third anniversary of the closing date of the Acquisition, any remaining escrowed funds will be remitted to Agway, Inc. at the end of the three-year period. Deferred taxes. For tax purposes, the assets and operations of the propane business line are reported within the Operating Partnership. Accordingly, the earnings attributable to the propane operations are not subject to federal and state income taxes at the entity level; rather, such earnings are included in the tax returns of the individual 8 partners. All other assets and operations acquired are reported within an indirect, wholly-owned subsidiary of the Operating Partnership that will be subject to corporate-level federal and state income taxes. The deferred tax assets established in purchase accounting represent the tax effect of temporary differences between the financial statement basis and tax basis of assets acquired and liabilities assumed as of the Acquisition date. The temporary differences primarily relate to certain accruals and reserves established for book purposes that are expected to give rise to future tax deductions. A full valuation allowance has been established in purchase accounting to offset the deferred tax assets since, based on the Partnership's current projections of future taxable income for the corporate entities, it is more likely than not that the benefits of these future deductible items will not be utilized. To the extent future projections of taxable income indicate deferred tax assets may be utilized, the valuation allowance will be reversed, with a corresponding reduction to goodwill. Severance and other restructuring costs. Termination benefits and relocation costs associated with employees of Agway Energy affected by integration and restructuring plans were recorded as part of purchase accounting. The individuals affected have been identified and their termination or relocation benefits have been communicated. Activities associated with the restructuring plans are expected to occur during the first twelve months following the Acquisition. Additional plans for integration and restructuring have been developed and are expected to result in additional restructuring costs to be recorded within purchase accounting during the third and fourth quarters of fiscal 2004. Derivative assets. Net current assets acquired includes a derivative asset in the amount of $7,860 representing the fair value of futures and option contracts acquired that were identified as hedges of future purchases of heating oil and propane. As the underlying futures and option contracts are settled the derivative assets are charged to cost of products sold as an offset to the realized gains from contract settlement. The impact on cost of products sold represents a non-cash charge resulting from the application of purchase accounting on derivative instruments acquired. For the three and six months ended March 27, 2004, the Partnership recorded a non-cash charge of $5,610 within cost of products sold related to contracts settled during the period. Pro Forma Results. The following unaudited pro forma information presents the results of operations of the Partnership as if the Acquisition had occurred at the beginning of the periods shown. The pro forma information, however, is not necessarily indicative of the results of operations assuming the Acquisition had occurred at the beginning of the periods presented, nor is it necessarily indicative of future results.
THREE MONTHS ENDED ---------------------------------------- MARCH 27, MARCH 29, 2004 2003 ------------------ ------------------- AS REPORTED PRO FORMA Revenues $ 574,578 $ 559,465 Income from continuing operations 78,355 76,912 Income from continuing operations per Common Unit - basic $ 2.52 $ 2.47 SIX MONTHS ENDED ---------------------------------------- MARCH 27, MARCH 29, 2004 2003 ------------------ ------------------- PRO FORMA PRO FORMA Revenues $ 963,572 $ 927,030 Income from continuing operations 102,737 104,142 Income from continuing operations per Common Unit - basic $ 3.30 $ 3.34
9 The as reported and pro forma income from continuing operations for the three and six months ended March 27, 2004 above include the $2,179 restructuring charge recorded in the second quarter of fiscal 2004, as further described in note 3 below. This restructuring charge was not reflected in the pro forma results for the three and six months ended March 29, 2003. The Partnership is in the process of determining the information which will be reviewed by its chief operating decision maker in accordance with SFAS No. 131, "Disclosures About Segments of and Enterprise," as a result of the addition of the multiple energy products and services of Agway Energy and expects to begin reporting segment information in the third quarter of fiscal 2004. 3. RESTRUCTURING COSTS During the second quarter of fiscal 2004, in connection with the initial integration of certain management and back office functions of Agway Energy, the Partnership's management approved and initiated plans to restructure the operations of both the Partnership and Agway Energy. Restructuring charges related to plans that have an impact on the assets, employees and operations of the Partnership will be recorded in current period earnings when specific decisions are approved and costs associated with such activities are incurred. Severance and other restructuring or relocation costs associated with assets, employees and operations of Agway Energy are recorded as liabilities assumed in the purchase business combination and result in an increase to goodwill. For the three and six months ended March 27, 2004, the Partnership recorded a restructuring charge of $2,179 within the consolidated statement of operations related primarily to employee termination costs incurred as a result of actions taken during the second quarter of fiscal 2004. The restructuring of the operations of the Partnership and Agway Energy will continue throughout the remainder of fiscal 2004 in order to achieve the anticipated synergies from the combined operations. As a result, additional restructuring charges including severance, costs of vacating duplicative facilities and contract termination and other exit costs, as well as asset impairment charges are expected to be incurred during the third and fourth quarters of fiscal 2004. The components of restructuring charges that were both expensed and recorded as part of purchase accounting are as follows:
UTILIZATION RESERVE AT RESTRUCTURING THROUGH MARCH 27, COSTS INCURRED MARCH 27, 2004 2004 --------------------- ---------------------- ----------------- Charges expensed: Severance and other employee costs $ 2,179 $ (401) $ 1,778 ===================== ====================== ================= CHARGES RECORDED IN PURCHASE ACCOUNTING: Severance and other employee costs $ 100 $ - $ 100 Relocation costs 525 - 525 --------------------- ---------------------- ----------------- Total $ 625 $ - $ 625 ===================== ====================== =================
The $1,778 in accrued severance and other termination benefits as of March 27, 2004 are expected to be paid over the course of the next twelve months. 4. INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined using a weighted average method for propane and refined fuels and a standard cost basis for appliances, which approximates average cost. Inventories consist of the following:
MARCH 27, SEPTEMBER 27, 2004 2003 ------------------ ------------------- Propane and refined fuels $ 48,576 $ 34,033 Appliances and related parts 12,106 7,477 ------------------ ------------------- $ 60,682 $ 41,510 ================== ===================
10 5. INCOME PER UNIT Basic income per Common Unit is computed by dividing income, after deducting the General Partner's approximate 2.5% interest, by the weighted average number of outstanding Common Units. Diluted income per Common Unit is computed by dividing income, after deducting the General Partner's approximate 2.5% interest, by the weighted average number of outstanding Common Units and time vested Restricted Units granted under the 2000 Restricted Unit Plan. In computing diluted income per Common Unit, weighted average Common Units outstanding used to compute basic income per Common Unit were increased by 115,266 units and 111,058 units for the three and six months ended March 27, 2004, respectively, and 60,225 units and 56,607 units for the three and six months ended March 29, 2003, respectively, to reflect the potential dilutive effect of the unvested portion of the time vested Restricted Units outstanding using the treasury stock method. Net income is allocated to the Common Unitholders and the General Partner in accordance with their respective Partnership ownership interests, after giving effect to any priority income allocations for incentive distributions allocated to the General Partner. 6. LONG-TERM BORROWINGS Long-term borrowings consist of the following:
MARCH 27, SEPTEMBER 27, 2004 2003 ------------------ ------------------ Senior Notes, 7.54%, due June 30, 2011 $ 340,000 $ 340,000 Senior Notes, 6.875%, due December 15, 2013 175,000 - Senior Notes, 7.37%, due June 30, 2012 42,500 42,500 Note payable, 8%, due in annual installments through 2006 1,321 1,322 Amounts outstanding under the Revolving Credit Agreement - - Other long-term liabilities 2 4 ------------------ ------------------ 558,823 383,826 Less: current portion 42,908 42,911 ------------------ ------------------ $ 515,915 $ 340,915 ------------------ ------------------
On December 23, 2003, the Partnership and Suburban Energy Finance Corporation, the co-issuer and wholly-owned subsidiary of the Partnership, issued $175,000 aggregate principal amount of Senior Notes (the "2003 Private Placement") with an annual interest rate of 6.875% through a private placement under Rule 144A and Regulation S of the Securities Act of 1933. On April 15, 2004, pursuant to a registration rights agreement, the Partnership launched an offer to exchange the $175,000 senior notes that were issued on December 23, 2003 with $175,000 senior notes that were registered with the SEC and which have substantially the same terms as the 2003 Private Placement (the "2003 Senior Notes"). The holders of senior notes that were issued on December 23, 2003 have until May 13, 2004 to exchange their notes for the 2003 Senior Notes. The Partnership's obligations under the 2003 Senior Notes are unsecured and will rank senior in right of payment to any future subordinated indebtedness and equally in right of payment with any future senior indebtedness. The 2003 Senior Notes are structurally subordinated to, which means they rank effectively behind, the senior notes and other liabilities of the Partnership's subsidiary operating partnership, Suburban Propane, L.P. (the "Operating Partnership"). The 2003 Senior Notes will mature December 15, 2013, and require semiannual interest payments beginning on June 15, 2004. The Partnership may redeem some or all of the 2003 Senior Notes any time on or after December 15, 2008, at redemption prices specified in the indenture governing the 2003 Senior Notes (the "2003 Senior Note Agreement"). The 2003 Senior Note Agreement contains certain restrictions applicable to the Partnership and certain of its subsidiaries with respect to (i) the incurrence of additional indebtedness; and (ii) liens, investments, guarantees, loans, advances, payments, mergers, consolidations, distributions, sales of assets and other transactions. 11 On March 5, 1996, pursuant to a Senior Note Agreement (the "1996 Senior Note Agreement"), the Operating Partnership issued $425,000 of Senior Notes (the "1996 Senior Notes") with an annual interest rate of 7.54%. The Operating Partnership's obligations under the 1996 Senior Note Agreement are unsecured and rank on an equal and ratable basis with the Operating Partnership's obligations under the 2002 Senior Note Agreement and the Revolving Credit Agreement discussed below. The 1996 Senior Notes will mature June 30, 2011, and require semiannual interest payments. Under the terms of the 1996 Senior Note Agreement, the Operating Partnership is obligated to pay the principal on the 1996 Senior Notes in equal annual payments of $42,500 which started July 1, 2002. On July 1, 2002, the Operating Partnership received net proceeds of $42,500 from the issuance of 7.37% Senior Notes due June, 2012 (the "2002 Senior Notes") and used the funds to pay the first annual principal payment of $42,500 due under the 1996 Senior Note Agreement. The Operating Partnership's obligations under the agreement governing the 2002 Senior Notes (the "2002 Senior Note Agreement") are unsecured and rank on an equal and ratable basis with the Operating Partnership's obligations under the 1996 Senior Note Agreement and the Revolving Credit Agreement. Rather than refinance the second annual principal payment of $42,500 due under the 1996 Senior Note Agreement, the Partnership elected to repay this principal payment on June 30, 2003. The third annual principal payment of $42,500 under the 1996 Senior Note Agreement is due July 1, 2004. The Partnership expects that it will be able to make this payment from cash flow from operations, its cash position or availability under its Revolving Credit Agreement. Alternatively, the Partnership may elect to refinance this next principal payment through either a private placement of senior notes or the issuance of additional senior notes under the 2003 Senior Note Agreement. On May 8, 2003, the Operating Partnership entered into the Second Amended and Restated Credit Agreement which extended the Revolving Credit Agreement until May 31, 2006 (as amended and restated, the "Revolving Credit Agreement"). The Revolving Credit Agreement provides a $75,000 working capital facility and a $25,000 acquisition facility. Borrowings under the Revolving Credit Agreement bear interest at a rate based upon either LIBOR plus a margin, Wachovia 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 March 27, 2004 and September 27, 2003, there were no borrowings outstanding under the Revolving Credit Agreement. The 1996 Senior Note Agreement, the 2002 Senior Note Agreement and the Revolving Credit Agreement contain various restrictive and affirmative covenants applicable to the Operating Partnership; including (a) maintenance of certain financial tests, including, but not limited to, a leverage ratio less than 5.0 to 1, an interest coverage ratio in excess of 2.50 to 1 and a leverage ratio of less than 5.25 to 1 when the underfunded portion of the Partnership's pension obligations is used in the computation of the ratio, (b) restrictions on the incurrence of additional indebtedness, and (c) restrictions on certain liens, investments, guarantees, loans, advances, payments, mergers, consolidations, distributions, sales of assets and other transactions. The Partnership and the Operating Partnership were in compliance with all covenants and terms of the 1996 Senior Note Agreement, the 2002 Senior Note Agreement, the 2003 Senior Note Agreement and the Revolving Credit Agreement as of March 27, 2004. Debt origination costs representing the costs incurred in connection with the placement of, and the subsequent amendments to, the Partnership's Senior Notes and Revolving Credit Agreement were capitalized within other assets and are being amortized on a straight-line basis over the term of the respective debt agreements. In connection with the issuance of the 2003 Senior Notes, the Partnership incurred debt origination costs of $5,782 which were capitalized within other assets and will be amortized over the 10-year maturity of the 2003 Senior Notes. Other assets at March 27, 2004 and September 27, 2003 include debt origination costs with a net carrying amount of $11,252 and $5,960, respectively. Aggregate amortization expense related to deferred debt origination costs included within interest expense was $371 and $621 for the three and six months ended March 27, 2004, respectively, and $364 and $711 for the three and six months ended March 29, 2003, respectively. Interest expense, net for the six months ended March 27, 2004 included a one-time fee of $1,936 related to a financing commitment received in connection with the Acquisition incurred during the first quarter of fiscal 2004. 12 7. DISTRIBUTIONS OF AVAILABLE CASH The Partnership makes distributions to its partners approximately 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 Second Amended and Restated 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 Partnership's business, the payment of debt principal and interest and for distributions during the next four quarters. Distributions by the Partnership in an amount equal to 100% of its Available Cash will generally be made 98.29% to the Common Unitholders and 1.71% to the General Partner prior to the public offering described in Note 11 (the "Public Offering"), and 98.46% to the Common Unitholders and 1.54% to the General Partner subsequent to the Public Offering, subject to the payment of incentive distributions to the General Partner to the extent the quarterly distributions exceed a target distribution of $0.55 per Common Unit. As defined in the Second Amended and Restated Partnership Agreement, the General Partner has certain Incentive Distribution Rights ("IDRs") which represent an incentive for the General Partner to increase distributions to Common Unitholders in excess of the target quarterly distribution of $0.55 per Common Unit. With regard to the first $0.55 per Common Unit of quarterly distributions paid in any given quarter, 98.46% of the Available Cash is distributed to the Common Unitholders and 1.54% is distributed to the General Partner (98.29% and 1.71%, respectively, prior to the Public Offering). With regard to the balance of quarterly distributions in excess of the $0.55 per Common Unit target distribution, 85% of the Available Cash is distributed to the Common Unitholders and 15% is distributed to the General Partner. On April 22, 2004, the Partnership declared an increase in its quarterly distribution to $0.60 per Common Unit, or $2.40 on an annualized basis, in respect of the second quarter of fiscal 2004 payable on May 11, 2004 to holders of record on May 4, 2004, compared to $0.5875 per Common Unit in the first quarter of fiscal 2004, and compared to $0.5750 per Common Unit for the second quarter of the prior year. This quarterly distribution includes incentive distribution rights payable to the General Partner to the extent the quarterly distribution exceeds $0.55 per Common Unit. 8. 2000 RESTRICTED UNIT PLAN During fiscal 2004, the Partnership awarded 115,730 Restricted Units under the 2000 Restricted Unit Plan at an aggregate value of $3,546. Restricted Units issued under the 2000 Restricted Unit Plan vest over time with 25% of the Common Units vesting at the end of each of the third and fourth anniversaries of the issuance date and the remaining 50% of the Common Units vesting at the end of the fifth anniversary of the issuance date. 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 Common Units by the award recipients during the restricted periods. The value of the Restricted Unit is established by the market price of the Common Units at the date of grant. Restricted Units are subject to forfeiture in certain circumstances as defined in the 2000 Restricted Unit Plan. Upon award of Restricted Units, the unamortized unearned compensation value is shown as a reduction to partners' capital. The unearned compensation is amortized ratably to expense over the restricted periods. 9. COMMITMENTS AND CONTINGENCIES The Partnership is self-insured for general and product, workers' compensation and automobile liabilities up to predetermined amounts above which third party insurance applies. At March 27, 2004 and September 27, 2003, the Partnership had accrued insurance liabilities of $27,162 and $28,639, 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 Partnership's financial position or future results of operations, after considering its self-insurance liability for known and unasserted self-insurance claims. 13 The Partnership is subject to various laws and governmental regulations concerning environmental matters and expects that it will be required to expend funds to participate in remediation of these matters. In connection with the Acquisition, the Partnership acquired certain surplus properties with either known or probable environmental exposure, some of which are currently in varying stages of investigation, remediation or monitoring. Additionally, the Partnership identified that certain active sites acquired contained environmental exposures which may require further investigation, future remediation or ongoing monitoring activities. The environmental exposures include instances of soil and/or groundwater contamination associated with the handling and storage of fuel oil, gasoline and diesel fuel. In the preliminary allocation of the purchase price to the assets acquired and liabilities assumed in the Acquisition, the Partnership established an environmental reserve of $8,500. This reserve estimate was based on the Partnership's current best estimate of future costs for environmental investigations, remediation and ongoing monitoring activities associated with acquired properties with either known or probable environmental exposures. Under the Purchase and Sale Agreement, however, Agway, Inc. set aside $15,000 from the total purchase price in a separate escrow account to fund any such future environmental costs and expenses. Accordingly, in the preliminary allocation of the purchase price, the Partnership established a corresponding environmental escrow asset in the amount of $8,500 related to the future expected reimbursement from escrowed funds for environmental spending. Under the terms of the Purchase and Sale Agreement, the escrowed funds will be used to fund such environmental costs and expenses during the first three years following the closing date of the Acquisition. Subject to amounts withheld with respect to any pending claims made prior to the third anniversary of the closing date of the Acquisition, any remaining escrowed funds will be remitted to the sellers at the end of the three-year period. Estimating the extent of the Partnership's responsibility for a particular site and the method and ultimate cost of remediation of that site requires a number of assumptions and estimates on the part of management. As a result, the ultimate outcome of remediation of the sites may differ from current estimates. As additional information becomes available, estimates will be adjusted as necessary. Based on information currently available, and taking into consideration the level of the environmental reserve and the $15,000 environmental escrow, management believes that any liability that may ultimately result from changes in current estimates will not have a material impact on the results of operations, financial position or cash flows of the Partnership. 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 2009. 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 equipment's fair value at the end of their lease terms has historically exceeded the guaranteed amounts, the maximum potential amount of aggregate future payments the Partnership could be required to make under these leasing arrangements, assuming the equipment is deemed worthless at the end of the lease term, is approximately $17,505. Of this amount, the fair value of residual value guarantees for operating leases entered into after December 31, 2002 was $2,781 and $2,067 which is reflected in other liabilities, with a corresponding amount included within other assets, in the accompanying condensed consolidated balance sheet as of March 27, 2004 and September 27, 2003, respectively. 11. PUBLIC OFFERING On December 16, 2003, the Partnership sold 2,600,000 Common Units in a public offering at a price of $30.90 per Common Unit realizing proceeds of $76,026, net of underwriting commissions and other offering expenses. On December 23, 2003, following the underwriters' full exercise of their over-allotment option, the Partnership sold an additional 390,000 Common Units at $30.90 per Common Unit, generating additional net proceeds of $11,540. The aggregate net proceeds of $87,566 were used to fund a portion of the purchase price for the Acquisition. These transactions increased the total number of Common Units outstanding to 30,256,767. As a result of the Public Offering, the combined General Partner interest in the Partnership was reduced from 1.71% to 1.54% while the Common Unitholder interest in the Partnership increased from 98.29% to 98.46%. 14 12. DISCONTINUED OPERATIONS On January 9, 2004, the Partnership sold ten customer service centers in Texas, Oklahoma, Missouri and Kansas for total cash proceeds of approximately $24,000. This divestiture is in line with the Partnership's strategy of divesting operations in slower growing or non-strategic markets in an effort to identify opportunities to optimize the return on assets employed. The Partnership recorded a gain on sale of approximately $14,205 for the three and six months ended March 27, 2004 which has been accounted for within discontinued operations pursuant to Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). In accordance with SFAS 144, the individual captions on the consolidated statements of operations for the three and six months ended March 27, 2004 and March 29, 2003 exclude the results from these discontinued operations. The net impact on the Partnership's discontinued operations was not significant for the three and six months ended March 27, 2004 and resulted in income from discontinued customer service centers of $1,050 for the three and six months ended March 29, 2003. 13. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS In December 2003, SFAS No. 132 (revised), "Employers' Disclosures about Pensions and Other Postretirement Benefits" (the "revised SFAS 132") was issued. The revised SFAS 132 requires additional disclosures in annual financial statements regarding types of plan assets held, investment strategies, measurement dates, plan obligations and cash flows, as well as certain disclosures in both interim and annual financial statements regarding components of net periodic benefit cost/(expense) and employer contributions. The following table provides the components of net periodic benefit costs for the three and six month periods ended March 27, 2004 and March 29, 2003: OTHER PENSION BENEFITS POSTRETIREMENT BENEFITS ------------------- ----------------------- THREE MONTHS ENDED THREE MONTHS ENDED MARCH 27, MARCH 29, MARCH 27, MARCH 29, 2004 2003 2004 2003 --------- --------- --------- ---------- Service cost $ -- $ 157 $ 5 $ 4 Interest cost 2,266 2,844 750 660 Expected return on plan assets (2,389) (3,014) -- -- Amortization of prior service costs -- -- (180) (180) Recognized net actuarial loss 1,497 1,017 -- 86 --------- --------- --------- ---------- Net periodic benefit cost $ 1,374 $ 1,004 $ 575 $ 570 ========= ========= ========= ========== SIX MONTHS ENDED SIX MONTHS ENDED MARCH 27, MARCH 29, MARCH 27, MARCH 29, 2004 2003 2004 2003 --------- --------- --------- ---------- Service cost $ -- $ 314 $ 10 $ 8 Interest cost 4,882 5,688 1,500 1,320 Expected return on plan assets (4,778) (6,028) -- -- Amortization of prior service costs -- -- (360) (360) Recognized net actuarial loss 2,994 2,034 -- 172 --------- --------- --------- ---------- Net periodic benefit cost $ 3,098 $ 2,008 $ 1,150 $ 1,140 ========= ========= ========= ========== There are no projected minimum employer contribution requirements for fiscal year 2004 under our defined benefit pension plan. The projected annual contributions requirements related to the Partnership's postretirement health care and life insurance benefit plan for the fiscal year ended September 25, 2004 are $2,500, of which $1,253 has been contributed during the six month period ended March 27, 2004. 15 ITEM 2. MANAGEMENT'S 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, 2004. The discussion should be read in conjunction with the historical consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the most recent fiscal year ended September 27, 2003. FACTORS THAT AFFECT OUR OPERATING RESULTS AND FINANCIAL CONDITION PRODUCT COSTS The level of profitability in the retail propane and fuel oil businesses is largely dependent on the difference between retail sales price and product cost. The unit cost of propane and fuel oil is subject to volatile changes 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. 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. SEASONALITY The retail propane and fuel oil distribution businesses are seasonal because of propane and fuel oil's primary use 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 (which we recently acquired through the Acquisition of Agway Energy) tends to have an even greater impact from seasonality given its more limited use for space heating and, as such, we expect that approximately three-fourths of our fuel oil volumes will be 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 products purchased during the winter heating season. Lower operating profits and either net losses or lower net income during the period from April through September (our third and fourth fiscal quarters) are expected. To the extent necessary, we will reserve cash from the second and third quarters for distribution to Common Unitholders in the first and fourth fiscal quarters. WEATHER Weather conditions have a significant impact on the demand for propane and fuel oil for both heating and agricultural purposes. Many of our customers rely heavily on propane or fuel oil 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 and fuel oil use, while sustained colder-than-normal temperatures will tend to result in greater use. RISK MANAGEMENT Product supply contracts are generally one-year agreements subject to annual renewal and generally permit suppliers to charge posted market prices (plus transportation costs) at the time of delivery or the current prices established at major delivery points. Since rapid increases in the cost of propane or fuel oil may not be immediately passed on to retail customers, such increases could reduce profitability. We engage in risk management activities to reduce the effect of price volatility on our product costs and to help ensure the availability of product during periods of short supply. We are currently a party to propane and fuel oil futures contracts traded on the New York Mercantile Exchange (the "NYMEX") and enter into forward and option agreements with third parties to purchase and sell propane or fuel oil at fixed prices in the future. Risk management activities are monitored by an internal Commodity Risk Management Committee, made up of five members of management, through enforcement of our 16 Commodity Trading Policy and reported to our Audit Committee. Risk management transactions may not always result in increased product margins. See the additional discussion in Item 3 of this Quarterly Report. CRITICAL ACCOUNTING POLICIES AND ESTIMATES 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 accounting principles generally accepted in the United States of America 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 legal reserves, environmental reserves, allowance for doubtful accounts, asset valuation assessment 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. Our significant accounting policies are summarized in Note 2 - Summary of Significant Accounting Policies included within the Notes to Consolidated Financial Statements section of the Annual Report on Form 10-K for the most recent fiscal year ended September 27, 2003. We believe that the following are our critical accounting policies: REVENUE RECOGNITION. We recognize revenue from the sale of propane and fuel oil 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 repair and maintenance activities is recognized upon completion of the service. ALLOWANCE FOR DOUBTFUL ACCOUNTS. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We estimate our allowance for doubtful accounts using a specific reserve for known or anticipated uncollectible accounts, as well as an estimated reserve for potential future uncollectible accounts taking into consideration our historical write-offs. If the financial condition of one or more of our customers were to deteriorate resulting in an impairment in their ability to make payments, additional allowances could be required. PENSION AND OTHER POSTRETIREMENT BENEFITS. We estimate the rate of return on plan assets, the discount rate to estimate the present value of future benefit obligations and the cost of future health care benefits in determining our annual pension and other postretirement benefit costs. In accordance with generally accepted accounting principles, actual results that differ from our assumptions are accumulated and amortized over future periods and therefore, generally affect our recognized expense and recorded obligation in such future periods. While we believe that our assumptions are appropriate, significant differences in our actual experience or significant changes in market conditions may materially affect our pension and other postretirement obligations and our future expense. See the Liquidity and Capital Resources section of Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations in the Annual Report on Form 10-K for the year ended September 27, 2003 for additional disclosure regarding pension and other postretirement benefits. SELF-INSURANCE RESERVES. Our accrued insurance reserves represent the estimated costs of known and anticipated or unasserted claims under our general and product, workers' compensation and automobile insurance policies. Accrued insurance provisions for unasserted claims arising from unreported incidents are based on an analysis of historical claims data. For each claim, we record a self-insurance provision up to the estimated amount of the 17 probable claim or the amount of the deductible, whichever is lower, utilizing actuarially determined loss development factors applied to actual claims data. ENVIRONMENTAL RESERVES. We establish reserves for environmental exposures when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated based upon our best estimate of costs associated with environmental remediation and ongoing monitoring activities. Accrued environmental reserves are exclusive of claims against third parties, except where contribution or reimbursement from such third parties has been agreed and we are reasonably assured of receiving such contribution or reimbursement. Environmental reserves are not discounted. GOODWILL IMPAIRMENT ASSESSMENT. We assess the carrying value of goodwill at a reporting unit level, at least annually, based on an estimate of the fair value of the respective reporting unit. Fair value of the reporting unit is estimated using either (i) a market value approach taking into consideration the quoted market price of our Common Units; or (ii) discounted cash flow analyses taking into consideration estimated cash flows in a ten-year projection period and a terminal value calculation at the end of the projection period. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. See Item 3 of this Quarterly Report for additional information about accounting for derivative instruments and hedging activities. EXECUTIVE SUMMARY OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The second quarter of fiscal 2004 ended March 27, 2004 was the first full quarter that includes the results from the Acquisition of substantially all of the assets and operations of Agway Energy, which closed on December 23, 2003. This Acquisition expands our product and service offerings in the northeast energy market with the addition of fuel oil and other refined products, as well as expansion of our heating, ventilation and air conditioning ("HVAC") service activities. The addition of Agway Energy has had a significant impact on our financial position, results of operations and cash flows in both the three and six month period ended March 27, 2004. The total cost of the Acquisition was approximately $211.2 million, consisting of the $205.0 million purchase price (net of a $1.0 million favorable purchase price adjustment for working capital), plus fees and expenses associated with the Acquisition. The Acquisition was financed through a combination of $87.6 million in net proceeds from the issuance of 2,990,000 Common Units and the remainder from a portion of the net proceeds from the issuance of $175.0 million in 6.875% senior notes, both during December 2003. As a result, we reported record earnings for the second quarter ended March 27, 2004 with net income of $92.6 million, or $2.97 per Common Unit, an increase of $34.3 million (58.8%) compared to net income of $58.3 million, or $2.31 per Common Unit, in the prior year quarter. EBITDA (as defined and reconciled below) of $112.6 million for the three months ended March 27, 2004 increased $38.6 million (52.2%) compared to $74.0 million from the prior year quarter. For the six month period ended March 27, 2004, we reported net income of $112.7 million, or $3.78 per Common Unit, compared to $81.6 million, or $3.23 per Common Unit, in the prior year period. EBITDA for the six month period ended March 27, 2004 increased $36.6 million (32.3%) to $149.8 million compared to $113.2 million in the prior year period. EBITDA and net income for the second quarter and first half of fiscal 2004 were favorably impacted by the net result of certain significant items, mainly relating to: (i) a $14.2 million gain from the sale of ten customer service centers in Texas, Oklahoma, Missouri and Kansas considered to be non-strategic, compared to a $2.4 million gain from the sale of five customer service centers during the second quarter of fiscal 2003; (ii) a non-cash charge of $5.6 million included within cost of products sold relating to the settlement of futures contracts which were marked-to-market under purchase accounting for the Acquisition; and, (iii) a $2.2 million restructuring charge related to our initial efforts to integrate certain management and back office functions of Agway Energy. These significant items had a net positive impact of $4.0 million on the year-over-year comparison of net income and EBITDA. From an operational perspective, retail propane volumes for the three month period ended March 27, 2004 of 219.9 million gallons increased 36.9 million gallons, or 20.2%, compared to the prior year quarter primarily as a result of the addition of Agway Energy, offset slightly by warmer than normal nationwide average temperatures 18 during the quarter. Sales of fuel oil and other refined fuels for the three month period ended March 27, 2004 amounted to 110.6 million gallons. Nationwide average temperatures, as reported by the National Oceanic and Atmospheric Administration ("NOAA"), averaged 3% warmer than normal in the second quarter of fiscal 2004 compared to 2% colder than normal in the prior year quarter, or 5% warmer temperatures year-over-year. For the six month period ended March 27, 2004, retail propane volumes increased 29.0 million gallons, or 9.0%, to 351.9 million gallons, primarily as a result of the Acquisition. Volumes for the six month period ended March 27, 2004 were negatively impacted by 4% warmer than normal average nationwide temperatures compared to 2% colder than normal temperatures in the prior year period. The first six months of fiscal 2004 marked several milestones for our Partnership, highlighted by the Acquisition and the successful completion of a concurrent follow-on equity offering and debt offering to finance the Acquisition. Following our record earnings level for the quarter ended March 27, 2004, we ended the second quarter of fiscal 2004 with approximately $61.4 million in cash and cash equivalents and had no amounts outstanding under our Revolving Credit Agreement as of March 27, 2004. During the first three months following the Acquisition, we have taken certain steps, as anticipated, to integrate the upper management and back office functions of Agway Energy. As we look ahead to the remainder of fiscal 2004, with the peak heating season behind us, we will focus on achieving synergies in our field operations and operational efficiencies from the combined entity. As was the case in the second quarter of fiscal 2004, we expect to incur additional restructuring charges and other costs to integrate the combined operations during the third and fourth quarters of fiscal 2004 in order to achieve the anticipated synergies from the Acquisition. Based on our current estimates of our cash flow from operations, our strong cash position at the end of the second quarter of fiscal 2004 and our availability under the Revolving Credit Agreement (unused borrowing capacity under the working capital facility of $61.5 million at March 27, 2004), we expect to have sufficient funds to meet our current and future obligations, including the additional cash requirements to fund our integration efforts. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 27, 2004 COMPARED TO THREE MONTHS ENDED MARCH 29, 2003 Revenues. Revenues increased $286.9 million, or 99.7%, to $574.6 million for the three months ended March 27, 2004 compared to $287.7 million for the three months ended March 29, 2003. Revenues from retail propane activities of $341.1 million for the three months ended March 27, 2004 increased $78.4 million, or 29.8%, compared to $262.7 million in the prior year quarter. This increase is the result of increased propane sales volumes, coupled with an increase in average selling prices. Retail propane gallons sold increased 36.9 million gallons, or 20.2%, to 219.9 million gallons in the second quarter of fiscal 2004 compared to 183.0 million gallons in the prior year quarter. The increase in retail propane gallons sold was attributable to the addition of Agway Energy, offset to an extent by warmer nationwide average temperatures during the second quarter of fiscal 2004 compared to the prior year quarter. Temperatures nationwide, as reported by NOAA, averaged 3% warmer than normal in the second quarter of fiscal 2004 compared to 2% colder than normal in the prior year quarter, or 5% warmer temperatures year-over-year. Average selling prices increased approximately 8.2% as a result of sustained higher commodity prices for propane. The average posted price of propane during the second quarter of fiscal 2004 increased approximately 1% compared to the average posted prices in the prior year quarter. Revenues from sales of fuel oil and other refined fuels amounted to $110.6 million for the three month period ended March 27, 2004 attributable to 110.6 million gallons sold from the addition of Agway Energy. Revenues from wholesale and risk management activities of $11.8 million for the three months ended March 27, 2004 increased $8.1 million, compared to revenues of $3.7 million for the three months ended March 29, 2003. The increase in wholesale and risk management activities results from slightly higher volumes sold in the wholesale market. Revenue from other sources, including sales of natural gas and electricity in deregulated markets, HVAC service activities and sales of appliances and related parts, of $111.1 million for the three months ended March 27, 2004 increased $89.9 million compared to other revenue in the prior year quarter of $21.2 million. The increase in other revenues is primarily attributable to the addition of natural gas and electricity marketing and service and maintenance revenues from Agway Energy. 19 Cost of Products Sold. The cost of products sold reported in the 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 appliances and related parts sold or installed by our customer service centers computed on a basis that approximates the average cost of the products. Cost of products sold is reported exclusive of any depreciation and amortization as such amounts are reported separately within the consolidated statements of operations. Cost of products sold increased $204.5 million to $346.7 million for the three months ended March 27, 2004 compared to $142.2 million in the prior year quarter. The increase results primarily from the aforementioned increase in retail propane volumes sold, as well as the addition of fuel oil and other refined fuel sales volumes during the second quarter of fiscal 2004, which had a combined impact of $127.4 million on the fiscal 2004 second quarter compared to the prior year quarter. Higher commodity prices for propane during the fiscal 2004 second quarter also resulted in an increase in cost of products sold in the amount of $21.5 million compared to the prior year quarter. Increased wholesale and risk management activities, noted above, caused an increase of $8.5 million in cost of products sold compared to the prior year quarter. Additionally, cost of products sold for the three months ended March 27, 2004 included a $5.6 million non-cash charge associated with the settlement of futures contracts that were acquired in the Acquisition. As the underlying futures and option contracts are settled the derivative assets are charged to cost of products sold as an offset to the realized gains from contract settlement. The impact on cost of products sold represents a non-cash charge resulting from the application of purchase accounting on derivative instruments acquired. In addition, the increase in revenues attributable to natural gas and electricity marketing, HVAC service activities and sales of appliances and related parts noted above had a $41.5 million impact on cost of products sold in the second quarter of fiscal 2004 compared to the prior year quarter. For the three months ended March 27, 2004, cost of products sold represented 60.3% of revenues compared to 49.4% in the prior year quarter. The increase in the cost of products sold as a percentage of revenue during the second quarter of fiscal 2004 compared to the prior year quarter results primarily from the addition of sales from fuel oil and other refined fuels, as well as the increased level of HVAC service and other sales activity generated from the Acquisition of Agway Energy. Generally, the percentage of the commodity price for fuel oil and other refined fuels on revenues tends to be between 20% and 30% higher than propane costs are as a percentage of propane revenues. Additionally, as was the case prior to the Acquisition, the percentage of cost of products sold for sales of appliances and related parts and HVAC services tends to be higher than that for the retail propane activities. Accordingly, the different mix of product sales during the second quarter of fiscal 2004 compared to the prior year quarter has had an impact on this percentage comparison. Operating Expenses. All other costs of operating our retail distribution and appliance sales and service operations are reported within operating expenses in the 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 our customer service centers. Operating expenses increased 69.7%, or $45.1 million, to $109.8 million for the three months ended March 27, 2004 compared to $64.7 million for the three months ended March 29, 2003. Operating expenses in the second quarter of fiscal 2004 include a $1.1 million unrealized (non-cash) gain representing the net change in fair values of derivative instruments during the quarter, compared to a $0.4 million unrealized loss in the prior year quarter (see Item 3 Quantitative and Qualitative Disclosures About Market Risk for information on our policies regarding the accounting for derivative instruments). In addition to the non-cash impact of changes in the fair value of derivative instruments, operating expenses increased primarily from the impact on employee, vehicle and facility costs from the addition of the Agway Energy operations for a full quarter. The most significant impact on operating expenses in the second quarter of fiscal 2004 was primarily attributable to (i) $25.0 million increased employee compensation and benefit costs related to an increase in field personnel, (ii) $7.2 million increase in vehicle related costs associated with the addition of the Agway Energy fleet, (iii) $2.5 million higher costs associated with operating and maintaining our facilities from the addition of the Agway Energy customer service centers, (iv) $2.3 million increased insurance costs, (v) $0.7 million 20 increased marketing and advertising costs, (vi) $0.7 million higher pension costs and, (vii) $0.6 million higher medical costs. General and Administrative Expenses. 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 consolidated statements of operations. General and administrative expenses of $17.4 million for the three months ended March 27, 2004 were $7.3 million, or 72.3%, higher than the prior year quarter of $10.1 million. The increase was primarily attributable to the impact of $4.5 million higher employee compensation and benefit costs as a result of higher profit levels and increased overall headcount to support increased activities from the Acquisition. In addition, in connection with the transition of Agway Energy we have incurred transition services fees in the amount of $2.3 million related to back office functions being performed by Agway, Inc. on our behalf during the first six months following the Acquisition, as well as higher travel and professional services fees associated with integration activities during the second quarter of fiscal 2004. Restructuring Costs. During the second quarter of fiscal 2004, in connection with the initial integration of certain management and back office functions of Agway Energy, we recorded a $2.2 million restructuring charge associated with employee termination and other benefit costs incurred as a result of actions taken during the quarter. The restructuring and integration of our field and back office functions will continue throughout the remainder of fiscal 2004 in order to achieve the anticipated synergies from the combined operations. As a result, additional restructuring charges including severance, costs of vacating duplicative facilities and contract termination and other exit costs, as well as asset impairment charges are expected to be incurred during the third and fourth quarters of fiscal 2004. Depreciation and Amortization. Depreciation and amortization expense increased $2.4 million, or 35.3%, to $9.2 million for the three months ended March 27, 2004 primarily as a result of the additional depreciation and amortization attributable to the acquired property, plant and equipment and identifiable intangible assets. Income Before Interest Expense and Income Taxes and EBITDA. Income before interest expense and income taxes of $89.2 million in the three months ended March 27, 2004 increased $25.4 million, or 39.8%, compared to $63.8 million in the prior year quarter. Earnings before interest, taxes, depreciation and amortization ("EBITDA") amounted to $112.6 million for the three months ended March 27, 2004, compared to $74.0 million for the prior year quarter, an increase of $38.6 million, or 52.2%. The increase in income before interest expense and income taxes and in EBITDA compared to the prior year quarter reflects the nearly 100% increase in revenues attributable to increased propane volumes, as well as the addition of multiple energy product offerings, including the increased level of HVAC service activities, from the addition of Agway Energy. The favorable impact on revenues and related margins was offset, to an extent, by the added operating and general and administrative costs described above to support the increased level of field operations, as well as to support integration and restructuring activities. In addition, the $14.2 million gain reported in the second quarter of fiscal 2004 and the $2.4 million gain reported in the second quarter of fiscal 2003 from the sale of customer service centers (reported within discontinued operations as described below) had a favorable impact on EBITDA in both the current and prior year quarters. EBITDA represents net income before deducting interest expense, income taxes, depreciation and amortization. Our management uses EBITDA as a measure of liquidity and we are including 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. Moreover, our senior note agreements and our Revolving Credit Agreement require us to use EBITDA as a component in calculating our leverage and interest coverage ratios. EBITDA is not a recognized term under generally accepted accounting principles ("GAAP") and should not be considered as an alternative to net income or net cash provided by operating activities determined in accordance with GAAP. Because EBITDA as determined by us excludes some, but not all, items that affect net income, it may not be comparable to EBITDA or similarly titled measures used by other companies. The following table sets forth (i) our calculation of EBITDA and (ii) a reconciliation of EBITDA, as so calculated, to our net cash provided by operating activities (amounts in thousands): 21
THREE MONTHS ENDED ----------------------- MARCH 27, MARCH 29, 2004 2003 ---------- ---------- Net income $ 92,560 $ 58,306 Add: Provision for income taxes 83 37 Interest expense, net 10,770 8,876 Depreciation and amortization 9,223 6,800 ---------- ---------- EBITDA 112,636 74,019 ---------- ---------- Add / (subtract): Provision for income taxes (83) (37) Interest expense, net (10,770) (8,876) (Gain) / loss on disposal of property, plant and equipment, net (79) 26 Gain on sale of customer service centers (14,205) (2,404) Changes in working capital and other assets and liabilities (75,726) (47,740) ---------- ---------- Net cash provided by operating activities $ 11,773 $ 14,988 ========== ========== Net cash provided by investing activities $ 15,355 $ 3,235 ========== ========== Net cash used in financing activities $ (18,348) $ (14,533) ========== ==========
Interest Expense. Net interest expense increased $1.9 million, or 21.3%, to $10.8 million in the second quarter of fiscal 2004 compared to $8.9 million in the prior year quarter. The increase in net interest expense is a result of the net impact of the addition of $175.0 million of 6.875% senior notes associated with financing for the Acquisition of Agway Energy, offset by $42.5 million lower amounts outstanding under our 7.54% senior notes as a result of the repayment of a portion of the principal on July 1, 2003. Discontinued Operations. As part of our overall business strategy, we continually monitor and evaluate our existing operations to identify opportunities that will allow us to optimize our return on assets employed by selectively consolidating or divesting operations in slower growing or non-strategic markets. In line with that strategy, we sold ten customer service centers in Texas, Oklahoma, Missouri and Kansas during the second quarter of fiscal 2004 for total cash proceeds of approximately $24.0 million. We recorded a gain on sale of approximately $14.2 million, which has been accounted for within discontinued operations pursuant to Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." In the prior year quarter, we sold five customer service centers for total cash proceeds of approximately $5.7 million, resulting in a gain on sale of approximately $2.4 million. Additionally, discontinued operations for the three months ended March 29, 2003 includes $1.1 million related to earnings generated in the second quarter of fiscal 2003 from the customer service centers discontinued in the second quarter of fiscal 2004. SIX MONTHS ENDED MARCH 27, 2004 COMPARED TO SIX MONTHS ENDED MARCH 29, 2003 Revenues. Revenues increased $308.3 million, or 63.3%, to $795.2 million for the six months ended March 27, 2004 compared to $486.9 million for the six months ended March 29, 2003. Revenues from retail propane activities of $517.9 million for the six months ended March 27, 2004 increased $87.9 million, or 20.4%, compared to $430.0 million in the prior year period. This increase is the result of an increase in propane sales volumes, coupled with an increase in average selling prices in line with higher commodity prices for propane. Despite nationwide average temperatures, as reported by NOAA, that were 4% warmer than normal and 6% warmer than the prior year, retail propane gallons sold increased 29.0 million gallons, or 9.0%, to 351.8 million gallons for the six months ended March 27, 2004. The increase is primarily attributable to the addition of Agway Energy from the date of the Acquisition, offset to an extent by the impact of the warmer temperatures. Average selling prices increased approximately 8.4% as a result of sustained higher commodity prices for propane. The average posted price of propane during the first six months of fiscal 2004 increased approximately 8% compared to the average posted prices in the prior year period. 22 Revenues from sales of fuel oil and other refined fuels amounted to $112.6 million for the six months ended March 27, 2004 attributable to 112.2 million gallons sold from the addition of Agway Energy on December 23, 2003. Revenues from wholesale and risk management activities of $20.2 million for the six months ended March 27, 2004 increased $10.8 million, compared to revenues of $9.4 million for the six months ended March 29, 2003. Revenue from other sources, including natural gas and electricity marketing to deregulated markets, HVAC service activities and sales of appliances and related parts, of $144.5 million for the six months ended March 27, 2004 increased $97.3 million compared to other revenue in the prior year period of $47.2 million. The increase in other revenues is primarily attributable to the addition of sales of natural gas and electricity and service and maintenance revenues from Agway Energy. Cost of Products Sold. Cost of products sold increased $222.3 million, or 94.7%, to $457.0 million for the six months ended March 27, 2004 compared to $234.7 million in the prior year period. The increase results primarily from the increase in retail propane volumes sold, as well as the addition of fuel oil and other refined fuel sales volumes, which had a combined impact of $122.9 million on the year-over-year comparison of cost of products sold. Higher commodity prices for propane during the first half of fiscal 2004 also resulted in an increase in cost of products sold by $36.7 million compared to the prior year. Increased wholesale and risk management activities, noted above, caused an increase of $11.0 million in cost of products sold compared to the prior year period. Additionally, cost of products sold for the six months ended March 27, 2004 included a $5.6 million non-cash charge associated with the settlement of futures contracts that were acquired in the Acquisition. As the underlying futures and option contracts are settled the derivative assets are charged to cost of products sold as an offset to the realized gains from contract settlement. The impact on cost of products sold represents a non-cash charge resulting from the application of purchase accounting on derivative instruments acquired. In addition, the increase in revenues attributable to natural gas and electricity marketing, HVAC service activities and sales of appliances and related parts noted above had a $46.1 million impact on cost of products sold in the six months ended March 27, 2004 compared to the prior year period. For the six months ended March 27, 2004, cost of products sold represented 57.5% of revenues compared to 48.2% in the prior year period. As described in the three month comparison above, the increase in the cost of products sold as a percentage of revenue during the first half of fiscal 2004 compared to the prior year period results primarily from the different mix of products sold and increased levels of HVAC service activities. Operating Expenses. Operating expenses of $172.6 million for the six month ended March 27, 2004 increased $49.4 million, or 40.0%, compared to $123.2 million for the prior year period. Operating expenses in the first half of fiscal 2004 include a $0.3 million unrealized (non-cash) gain representing the net change in fair values of derivative instruments during the period, compared to a $1.4 million unrealized loss in the prior year period (see Item 3 Quantitative and Qualitative Disclosures About Market Risk for information on our policies regarding the accounting for derivative instruments). In addition to the non-cash impact of changes in the fair value of derivative instruments, operating expenses increased $51.1 million as a result of (i) $26.1 million increased employee compensation and benefit costs associated with the addition of Agway Energy personnel and increased earnings, (ii) $7.6 million increased costs for operating our fleet as a result of the addition of the Agway Energy fleet, (iii) $2.7 million higher costs to operate the additional customer service centers acquired, (iv) $2.7 million incremental insurance costs, (v) $1.1 million higher pension costs, and (vi) $1.0 million higher medical costs. General and Administrative Expenses. General and administrative expenses of $27.9 million for the six months ended March 27, 2004 were $8.7 million, or 45.3%, higher than the prior year period of $19.2 million. The increase was primarily attributable to the impact of $5.0 million higher employee compensation and benefit costs as a result of higher profit levels and increased overall headcount, as well as $2.3 million related to transition services fees paid to Agway, Inc. for back office support provided subsequent to the Acquisition. In addition, we incurred incremental travel and professional fees in the first quarter of fiscal 2004 associated with our efforts to acquire Agway Energy and higher costs in the second quarter of fiscal 2004 in connection with our integration efforts. Restructuring Costs. As discussed in more detail in the three month comparison above, during the second quarter of fiscal 2004 we recorded a $2.2 million restructuring charge associated with employee termination and 23 other benefit costs incurred as a result of actions taken during the second quarter to integrate certain management and back office functions of Agway Energy. Depreciation and Amortization. Depreciation and amortization expense increased 19.6% to $16.5 million for the six months ended March 27, 2004 compared to $13.8 million for the prior year period, primarily as a result of the additional depreciation and amortization associated with the acquired tangible and intangible assets. Income Before Interest Expense and Income Taxes and EBITDA. Income before interest expense and income taxes of $119.1 million in the six months ended March 27, 2004 increased $23.1 million, or 24.1%, compared to $96.0 million in the prior year period. Earnings before interest, taxes, depreciation and amortization ("EBITDA") amounted to $149.8 million for the six months ended March 27, 2004, compared to $113.2 million for the prior year period, an increase of $36.6 million, or 32.3%. The increases in income before interest expense and income taxes and in EBITDA compared to the prior year period reflects the favorable impact on revenues and related margins from the addition of the Agway Energy operations. This favorable impact was offset, to an extent, by the added operating and general and administrative costs to support the increased level of field operations, as well as to support integration and restructuring activities. Additionally, the warmer than normal temperatures experienced during the first half of fiscal 2004, described above, negatively impacted volumes for the period compared to the prior year. In addition, the $14.2 million gain reported in the second quarter of fiscal 2004 and the $2.4 million gain reported in the second quarter of fiscal 2003 from the sale of customer service centers (reported within discontinued operations) had a favorable impact on EBITDA in both the current and prior year periods. EBITDA represents net income before deducting interest expense, income taxes, depreciation and amortization. Our management uses EBITDA as a measure of liquidity and we are including 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. Moreover, our senior note agreements and our Revolving Credit Agreement require us to use EBITDA as a component in calculating our leverage and interest coverage ratios. EBITDA is not a recognized term under generally accepted accounting principles ("GAAP") and should not be considered as an alternative to net income or net cash provided by operating activities determined in accordance with GAAP. Because EBITDA as determined by us excludes some, but not all, items that affect net income, it may not be comparable to EBITDA or similarly titled measures used by other companies. The following table sets forth (i) our calculation of EBITDA and (ii) a reconciliation of EBITDA, as so calculated, to our net cash provided by operating activities (amounts in thousands):
SIX MONTHS ENDED ---------------------- MARCH 27, MARCH 29, 2004 2003 --------- --------- Net income $ 112,651 $ 81,560 Add: Provision for income taxes 166 167 Interest expense, net 20,481 17,732 Depreciation and amortization 16,452 13,773 --------- --------- EBITDA 149,750 113,232 --------- --------- Add / (subtract): Provision for income taxes (166) (167) Interest expense, net (20,481) (17,732) Gain on disposal of property, plant and equipment, net (161) (320) Gain on sale of customer service centers (14,205) (2,404) Changes in working capital and other assets and liabilities (91,403) (69,243) --------- --------- Net cash provided by operating activities $ 23,334 $ 23,366 ========= ========= Net cash used in (provided by) investing activities $(199,640) $ 674 ========= ========= Net cash provided by / (used in) financing activities $ 221,967 $ (29,124) ========= =========
24 Interest Expense. Net interest expense increased $2.8 million, or 15.8%, to $20.5 million in the first half of fiscal 2004 compared to $17.7 million in the prior year period, primarily as a result of a one-time fee of $1.9 million related to financing commitments for the Acquisition incurred during the first quarter of fiscal 2004. In addition, net interest expense increased as a result of the net impact of the addition of $175.0 million of 6.875% senior notes associated with financing for the Acquisition, offset by $42.5 million lower amounts outstanding under our 7.54% senior notes. Discontinued Operations. As described above, we sold ten customer service centers in Texas, Oklahoma, Missouri and Kansas during the second quarter of fiscal 2004 for total cash proceeds of approximately $24.0 million. We recorded a gain on sale of approximately $14.2 million, which has been accounted for within discontinued operations. In the prior year quarter, we sold five customer service centers for total cash proceeds of approximately $5.7 million, resulting in a gain on sale of approximately $2.4 million. Additionally, discontinued operations for the six months ended March 29, 2003 includes $1.1 million related to earnings generated in the first half of fiscal 2003 from the customer service centers discontinued in the second quarter of fiscal 2004. LIQUIDITY AND CAPITAL RESOURCES Due to the seasonal nature of the propane and fuel oil businesses, cash flows from operating activities are greater during the winter and spring seasons, our second and third fiscal quarters, as customers pay for products purchased during the heating season. For the six months ended March 27, 2004, net cash provided by operating activities was $23.3 million compared to cash provided by operating activities of $23.4 million for the six months ended March 29, 2003. The slight decrease was primarily due to increased earnings for the six months ended March 27, 2004 compared to the prior year period, offset by a $22.2 million increase in the investment in working capital. The changes in working capital result primarily from an increase in accounts receivable and inventories in line with increased sales volumes and higher commodity prices, offset to a degree by lower payments under employee compensation plans and higher accounts payable. Net cash used in investing activities of $199.6 million for the six months ended March 27, 2003 consists of the net impact of the total cost of the Acquisition of Agway Energy of approximately $211.2 million, offset to an extent by net proceeds from the sale of ten customer service centers of $24.0 million and net proceeds of $0.4 million from the sale of property, plant and equipment. Additionally, capital expenditures amounted to $12.9 million (including $2.5 million for maintenance expenditures and $10.4 million to support the growth of operations) for the six month period ended March 27, 2004. Net cash provided by investing activities of $0.7 million during the six months ended March 29, 2003 consisted of net proceeds from the sale of five customer service centers of $5.7 million and net proceeds of $1.0 million from the sale of property, plant and equipment; offset by capital expenditures of $6.0 million (including $1.7 million for maintenance expenditures and $4.3 million to support the growth of operations). Net cash provided by financing activities for the six months ended March 27, 2004 was $222.0 million as a result of (i) the issuance of $175.0 million aggregate principal amount of 6.875% senior notes due 2013, a portion of which was used to fund a portion of the Acquisition and, (ii) the net proceeds of $87.6 million from a follow-on public offering of 2,990,000 Common Units (including full exercise of the underwriters' over-allotment option) during December 2003 to fund a portion of the Acquisition; offset by (i) the payment of our quarterly distributions of $0.5875 per Common Unit during each of the first two quarters of fiscal 2004 amounting to $34.7 million and, (ii) $5.9 million in fees associated with the issuance of the senior notes noted above. Net cash used in financing activities for the six months ended March 29, 2003 was $29.1 million, primarily reflecting payment of our quarterly distributions of $0.5750 per Common Unit during the first and second quarters of fiscal 2003. On December 23, 2003, we issued $175.0 million aggregate principal amount of senior notes with an annual interest rate of 6.875% through a private placement under Rule 144A and Regulation S of the Securities Act of 1933. On April 15, 2004, pursuant to a registration rights agreement, we launched an offer to exchange the $175.0 million senior notes that were issued on December 23, 2003 with $175.0 million senior notes that were registered with the SEC and which have substantially the same terms as the senior notes issued on December 23, 2003 (the "2003 Senior Notes"). The holders of senior notes that were issued on December 23, 2003 have until May 13, 2004 to exchange their notes for the 2003 Senior Notes. We used approximately $122.4 million from the issuance of the 25 6.875% senior notes to fund a portion of the total cost of the Acquisition and the remaining net proceeds for general partnership purposes, which include working capital purposes, capital expenditures or debt reduction. Our obligations under the 2003 Senior Notes are unsecured and will rank senior in right of payment to any future subordinated indebtedness and equally in right of payment with any future senior indebtedness. The 2003 Senior Notes are structurally subordinated to, which means they rank effectively behind, the senior notes and other liabilities of the Operating Partnership. The 2003 Senior Notes will mature December 15, 2013, and require semiannual interest payments beginning on June 15, 2004. We may redeem some or all of the 2003 Senior Notes any time on or after December 15, 2008, at redemption prices specified in the indenture governing the 2003 Senior Notes (the "2003 Senior Note Agreement"). The 2003 Senior Note Agreement contains certain restrictions applicable to us and certain of our subsidiaries with respect to (i) the incurrence of additional indebtedness; and (ii) liens, investments, guarantees, loans, advances, payments, mergers, consolidations, distributions, sales of assets and other transactions. On March 5, 1996, pursuant to a Senior Note Agreement (the "1996 Senior Note Agreement"), our Operating Partnership issued $425.0 million of senior notes (the "1996 Senior Notes") with an annual interest rate of 7.54%. Our Operating Partnership's obligations under the 1996 Senior Note Agreement are unsecured and rank on an equal and ratable basis with its obligations under the 2002 Senior Note Agreement and the Revolving Credit Agreement discussed below. Under the terms of the 1996 Senior Note Agreement, our Operating Partnership became obligated to pay the principal on the 1996 Senior Notes in equal annual payments of $42.5 million starting July 1, 2002, with the last such payment due June 30, 2011. On July 1, 2002, we received net proceeds of $42.5 million from the issuance by our Operating Partnership of 7.37% Senior Notes due June, 2012 (the "2002 Senior Notes") and used the funds to pay the first annual principal payment of $42.5 million due under the 1996 Senior Note Agreement. Our Operating Partnership's obligations under the agreement governing the 2002 Senior Notes (the "2002 Senior Note Agreement") are unsecured and rank on an equal and ratable basis with its obligations under the 1996 Senior Note Agreement and the Revolving Credit Agreement. Rather than refinance the second annual principal payment of $42.5 million due under the 1996 Senior Note Agreement, we elected to repay this principal payment on June 30, 2003. The third annual principal payment of $42.5 million under the 1996 Senior Note Agreement is due July 1, 2004. We expect that we will be able to be make this payment from cash flow from operations, our cash position or availability under our Revolving Credit Agreement. Alternatively, we may elect to refinance this next principal payment through either a private placement of senior notes or the issuance of additional senior notes under the 2003 Senior Note Agreement. Our Operating Partnership's Revolving Credit Agreement, which provided a $75.0 million working capital facility and a $25.0 million acquisition facility, matures on May 31, 2006. Borrowings under the Revolving Credit Agreement bear interest at a rate based upon either LIBOR plus a margin, Wachovia 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 March 27, 2004 and September 27, 2003, there were no borrowings outstanding under the Revolving Credit Agreement. As of March 27, 2004, we had $61.5 million of unused borrowing capacity under the working capital facility of our Revolving Credit Agreement, after considering the impact on borrowing availability from outstanding letters of credit associated with our casualty insurance coverage and certain operating lease obligations. We are currently evaluating the adequacy of the borrowing capacity provided under the Revolving Credit Agreement in light of the additional seasonal cash needs of Agway Energy, as well as any future needs that may arise as a result of our growth initiatives. Although not currently contemplated, we may need to increase the borrowing capacity of the Revolving Credit Agreement in the future to accommodate seasonal working capital requirements associated with the added business activity from Agway Energy. The 1996 Senior Note Agreement, the 2002 Senior Note Agreement and the Revolving Credit Agreement contain various restrictive and affirmative covenants applicable to the Operating Partnership, including (a) maintenance of certain financial tests, including, but not limited to, a leverage ratio of less than 5.0 to 1, an interest coverage ratio in excess of 2.5 to 1 and a leverage ratio of less than 5.25 to 1 when the underfunded portion of our pension obligations is used in the computation of the ratio, (b) restrictions on the incurrence of additional indebtedness, and (c) restrictions on certain liens, investments, guarantees, loans, advances, payments, mergers, consolidations, distributions, sales of assets and other transactions. Our Operating Partnership was in compliance with all covenants and terms of all of its debt agreements as of March 27, 2004 and at the end of each fiscal quarter for all periods presented. 26 We will make distributions in an amount equal to all of our Available Cash, as defined in the Second Amended and Restated Partnership Agreement, approximately 45 days after the end of each fiscal quarter to holders of record on the applicable record dates. The Board of Supervisors reviews the level of Available Cash on a quarterly basis based upon information provided by management. On April 22, 2004, we declared an increase in our quarterly distribution rate to $0.60 per Common Unit, or $2.40 on an annualized basis, in respect of the second quarter of fiscal 2004 payable on May 11, 2004 to Common Unitholders of record on May 4, 2004. This quarterly distribution represents a $0.0125 per Common Unit, $0.05 per Common Unit annualized, increase from the prior quarter. Quarterly distributions include Incentive Distribution Rights ("IDRs") payable to the General Partner to the extent the quarterly distribution exceeds $0.55 per Common Unit. The IDRs represent an incentive for the General Partner (which is owned by the management of the Partnership) to increase the distributions to Common Unitholders in excess of $0.55 per Common Unit. With regard to the first $0.55 of the Common Unit distribution, 98.46% of the Available Cash is distributed to the Common Unitholders and 1.54% is distributed to the General Partner (98.29% and 1.71%, respectively, prior to our December 2003 public offering). With regard to the balance of the Common Unit distributions paid, 85% of the Available Cash is distributed to the Common Unitholders and 15% is distributed to the General Partner. LONG-TERM DEBT OBLIGATIONS AND OTHER COMMITMENTS Long-term debt obligations and future minimum rental commitments under noncancelable operating lease agreements as of March 27, 2004 are due as follows (amounts in thousands):
REMAINDER FISCAL OF FISCAL FISCAL FISCAL FISCAL 2008 AND 2004 2005 2006 2007 THEREAFTER TOTAL -------- -------- -------- -------- -------- -------- Long-term debt $ 42,908 $ 42,940 $ 42,975 $ 42,500 $387,500 $558,823 Operating leases 12,807 17,949 11,912 7,540 7,092 57,300 -------- -------- -------- -------- -------- -------- Total long-term debt obligations and lease commitments $ 55,715 $ 60,889 $ 54,887 $ 50,040 $394,592 $616,123 ======== ======== ======== ======== ======== ========
Additionally, we have standby letters of credit in the aggregate amount of $43.4 million, in support of our casualty insurance coverage and certain lease obligations, which expire periodically through March 1, 2005. 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 2009. 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 difference. Although the equipment's fair value 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 $17.5 million. Of this amount, the fair value of residual value guarantees for operating leases entered into after December 31, 2002 was $2.8 million and $2.1 million which is reflected in other liabilities, with a corresponding amount included within other assets, in the accompanying condensed consolidated balance sheets as of both March 27, 2004 and September 27, 2003, respectively. PUBLIC OFFERING On December 16, 2003, we sold 2,600,000 Common Units in a public offering at a price of $30.90 per Common Unit realizing proceeds of $76.0 million, net of underwriting commissions and other offering expenses. On December 23, 2003, following the underwriters' full exercise of their over-allotment option, we sold an additional 390,000 Common Units at $30.90 per Common Unit, generating additional net proceeds of $11.6 million. The aggregate net proceeds of $87.6 million were used to fund a portion of the purchase price for the Acquisition. These 27 transactions increased the total number of Common Units outstanding to 30,256,767. As a result of the Public Offering, the combined General Partner interest was reduced from 1.71% to 1.54% while the Common Unitholder interest increased from 98.29% to 98.46%. RECENTLY ISSUED ACCOUNTING STANDARDS In December 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 132 (revised), "Employers' Disclosures about Pensions and Other Postretirement Benefits" (the "revised SFAS 132"). The revised SFAS 132 requires additional disclosures in annual financial statements regarding types of plan assets held, investment strategies, measurement dates, plan obligations and cash flows, as well as certain disclosures in both interim and annual financial statements regarding components of net periodic benefit cost/(expense) and employer contributions. The revised SFAS 132 interim disclosures requirements were adopted as of and for the second quarter ended March 27, 2004. The annual disclosure requirements will be included in our Annual Report on Form 10-K for the year ended September 25, 2004. DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains Forward-Looking Statements as defined in the Private Securities Litigation Reform Act of 1995 relating to the Partnership's future business expectations and predictions and financial condition and results of operations. 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. The risks and uncertainties and their impact on the Partnership's operations include, but are not limited to, the following risks: o The impact of weather conditions on the demand for propane, fuel oil and other refined fuels; o Fluctuations in the unit cost of propane, fuel oil and other refined fuels; o The ability of the Partnership to compete with other suppliers of propane, fuel oil and other energy sources; o The impact on propane, fuel oil and other refined fuel prices and supply from the political, military and economic instability of the oil producing nations, global terrorism and other general economic conditions; o The ability of the Partnership to realize fully, or within the expected time frame, the expected cost savings and synergies from the acquisition of Agway Energy; o The ability of the Partnership to acquire and maintain reliable transportation for its propane, fuel oil and other refined fuels; o The ability of the Partnership to retain customers; o The impact of energy efficiency and technology advances on the demand for propane and fuel oil; o The ability of management to continue to control expenses; o The impact of changes in applicable statutes and government regulations, or their interpretations, including those relating to the environment and global warming and other regulatory developments on the Partnership's business; o The impact of legal proceedings on the Partnership's business; o The Partnership's ability to implement its expansion strategy into new business lines and sectors; and o The Partnership's ability to integrate acquired businesses successfully. On different occasions, the Partnership or its representatives have made or may make Forward-Looking Statements in other filings that the Partnership makes with the SEC, in press releases or in oral statements made by or with the approval of one of its authorized executive officers. Readers are cautioned not to place undue reliance on Forward-Looking or Cautionary Statements, which reflect management's opinions only as of the date made. The Partnership undertakes no obligation to update any Forward-Looking or Cautionary Statement. 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. 28 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As of March 27, 2004, we were a party to exchange-traded futures and option contracts, forward contracts and in certain instances, over-the-counter options (collectively "derivative instruments") to manage the price risk associated with future purchases of the commodities used in its operations, principally propane and fuel oil. Futures and forward contracts require that we sell or acquire propane or fuel oil at a fixed price 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; 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. The contracts are entered into in anticipation of market movements and to manage and hedge exposure to fluctuating prices of propane and fuel oil, as well as to help ensure the availability of product during periods of high demand. Market risks associated with the trading of futures, options and forward contracts are monitored daily for compliance with our Commodity 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. 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. CREDIT RISK Futures are guaranteed by the NYMEX and, as a result, have minimal credit risk. We are subject to credit risk with forward and 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 credit risk of non-performance. DERIVATIVE INSTRUMENTS We account for derivative instruments in accordance with the provisions of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), as amended by SFAS No. 137 and SFAS No. 138. All derivative instruments are reported on the balance sheet, within other current assets or other current liabilities, 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 other comprehensive income/(loss) ("OCI"), depending on whether a derivative instrument is designated as a hedge and, if it is, the type of hedge. For derivative instruments designated as cash flow hedges, we formally assess, 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 hedges are recorded in current period earnings within operating expenses. A portion of our option contracts are not classified as hedges and, as such, changes in the fair value of these derivative instruments are recognized within operating expenses as they occur. Fair values for forward contracts and futures are derived from quoted market prices for similar instruments traded on the NYMEX. 29 At March 27, 2004, the fair value of derivative instruments described above resulted in derivative assets of $5.4 million included within prepaid expenses and other current assets and derivative liabilities of $0.5 million included within other current liabilities. Operating expenses include unrealized (non-cash) gains in the amount of $1.1 million for the three months ended March 27, 2004 and unrealized losses in the amount of $0.4 million for the three months ended March 29, 2003 attributable to the change in fair value of derivative instruments not designated as hedges. Operating expenses include unrealized gains in the amount of $0.3 million for the six months ended March 27, 2004 and unrealized losses in the amount of $1.4 million for the six months ended March 29, 2003 attributable to the change in fair value of derivative instruments not designated as hedges. At March 27, 2004, unrealized gains on derivative instruments designated as cash flow hedges in the amount of $0.8 million were included in OCI and are expected to be recognized in earnings during the next 12 months as the hedged transactions occur. However, due to the volatility of the commodities market, the corresponding value in OCI is subject to change prior to its impact on earnings. SENSITIVITY ANALYSIS In an effort to estimate the exposure of unfavorable market price movements, a sensitivity analysis of open positions as of March 27, 2004 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 either a reduction in potential future gains or potential losses in future earnings of $1.3 million and $0.8 million as of March 27, 2004 and March 29, 2003, respectively. See also Item 7A of our Annual Report on Form 10-K for the fiscal year ended September 27, 2003. 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 at any given point in time. 30 ITEM 4. CONTROLS AND PROCEDURES Our management, including our principal executive officer and principal financial officer, have evaluated the effectiveness of our "disclosure controls and procedures" (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934) as of March 27, 2004. Based on such evaluation, our principal executive officer and principal financial officer have concluded that as of March 27, 2004, such disclosure controls and procedures are effective for the purpose of ensuring that material information required to be in this Quarterly Report on Form 10-Q is made known to them by others on a timely basis. Other than the impact of the recently completed acquisition of Agway Energy, there have not been any changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934) during the quarter ending March 27, 2004 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting. This Acquisition is changing how transactions are being processed and/or the functional areas responsible for the transaction processing. As a result, where appropriate, we are changing the design and operation of our internal control structure. We believe we are taking the necessary steps to monitor and maintain appropriate internal controls over financial reporting during this change. 31 PART II ITEM 1. LEGAL PROCEEDINGS On May 23, 2001, our Operating Partnership was named as an additional defendant in an action previously brought by Heritage Propane Partners against SCANA Corporation and Cornerstone Ventures, L.P. arising out of our acquisition of substantially all of the propane assets of SCANA in November of 1999. We believe that all of the claims asserted against our Operating Partnership are without merit and are defending the action vigorously. The court has entered an order setting this matter for trial beginning on October 4, 2004. At the close of discovery, we intend to file a motion for summary judgment to dismiss the claims asserted against our Operating Partnership. See additional discussion of this matter in the Annual Report on Form 10-K for the most recent fiscal year ended September 27, 2003. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.29 Asset Purchase Agreement by and among Ferrellgas, L.P., Suburban Sales and Service, Inc. and Suburban Propane, L.P. dated as of January 9, 2004. 31.1 Certification of the President and Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of the Vice President and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 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. 32.2 Certification of the Vice President and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) The Partnership filed the following Reports on Form 8-K with the Securities and Exchange Commission during the three months ended March 27, 2004: On January 15, 2004, the Partnership filed two press releases announcing (i) the completion of the Agway Energy acquisition and (ii) the sale of certain propane related assets to Ferrellgas, L.P., as exhibits to a Current Report on Form 8-K. On March 19, 2004 the Partnership filed (i) the unaudited condensed combined financial statements of Agway Energy Group (Agway Energy Products LLC, Agway Energy Services Inc. and Agway Energy Services PA, Inc.) as of September 30, 2003 and June 30, 2003 and for each of the three months ended September 30, 2003 and 2002 and the notes related thereto, and (ii) the unaudited pro forma condensed combined statement of operations of Suburban Propane Partners, L.P. and Agway Energy for the three month period ended December 27, 2003 and the notes related thereto, as exhibits to a Current Report on Form 8-K.On October 14, 2003, the Partnership filed the unaudited balance sheets of the General Partner, as of June 28, 2003 and September 28, 2002, as an exhibit to a Current Report on Form 8-K. Other items under Part II are not applicable. 32 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. Suburban Propane Partners, L.P. May 11, 2004 /s/ ROBERT M. PLANTE - ------------ -------------------- Date Robert M. Plante Vice President and Chief Financial Officer May 11, 2004 /s/ MICHAEL A. STIVALA - ------------ ---------------------- Date Michael A. Stivala Controller (Principal Accounting Officer) 33 EX-10.29 2 file002.txt PURCHASE AND NONCOMPETITION AGREEMENT Exhibit 10.29 PURCHASE AND NONCOMPETITION AGREEMENT THIS PURCHASE AND NONCOMPETITION AGREEMENT (this "Agreement") is made and entered into this 9th day of January, 2004, by and between Ferrellgas, L.P., a Delaware limited partnership ("Buyer"), and Suburban Propane, L.P., a Delaware limited partnership ("SP"), and Suburban Sales and Service, Inc., a Delaware corporation ("SSS" and, collectively with SP, "Seller"). W I T N E S S E T H That in consideration of the mutual covenants herein contained, the parties agree as follows: I. SALE AND PURCHASE. 1.1 Agreements to Sell and Purchase. Seller agrees to sell, transfer, assign and deliver to Buyer, and Buyer agrees to purchase and accept from Seller, on the Closing Date (hereinafter defined), the property of Seller referred to in this Section 1.1 (not specifically excluded under Section 1.2 below), relating to Seller's propane operations (the "Operations") within the states of Texas, Oklahoma, Missouri and Kansas as carried on at the locations identified in Exhibit 1.1 ("the "Locations"), as follows: a. All propane inventory held by Seller at the Locations on the Closing Date; b. All propane tanks, cylinders, dispensers, regulators, piping, vehicles, fixtures constituting Seller's bulk facilities, tools and other equipment at or serviced from the Locations, including, without limitation, those assets described on Exhibit 1.1b; c. To the extent assignable, all of Seller's right, title and interest in and to permits, licenses (including truck licenses) and telephone numbers used in connection with the Operations at the Locations; d. All of Seller's propane products accounts, retail accounts and service customers serviced from or at the Locations, including without limitation, all of Seller's right, title and interest in and to the originals and all copies of customer lists and records; e. All customer contracts and fuel supply contracts with customers serviced from or at the Locations, including, without limitation, contracts on product tanks and customer locations; and all contract rights arising from non-compete and non-solicit agreements; f. All customer leases and lease option agreements covering the propane tanks and cylinders owned or leased by Seller to customers serviced from the Locations; g. All real estate owned by Seller for use in the Operations, as more particularly described in the deeds attached hereto as Exhibit 2.2.3, including all fixtures attached thereto and improvements and buildings thereon; h. Unless specifically excluded, all rights of Seller under real property leases for leased real estate used in the Operations, and contracts of the Operations; i. Trade accounts receivable of the Operations for account debtors serviced from the Locations, as of the Closing Date (the "Purchased Accounts Receivable"); j. All warranty rights of Seller, express or implied, with respect to the property described in this Section 1.1; k. All of Seller's propane parts and fittings which are used at the Locations as operating supplies to maintain and repair propane tanks and lines, whether or not generally billed to Seller's customers; l. All of Seller's appliance inventory at the Locations. 1.2 Excluded Assets. The assets and properties of Seller to be sold and purchased under Section 1.1 shall not include (i) cash on hand or in banks; (ii) any Underground Storage Tanks (as defined by 40 C.F.R. 280); (iii) the Retained Accounts Receivable (as defined in Section 1.3c); (iv) any right, title, or interest in or to the names Suburban Propane, L.P., Suburban Propane, Suburban Sales and Service, Inc., or any derivatives thereof, or any other trademarks, service marks or trade names, or any software or intellectual property used in connection with or otherwise attributable to the Seller's business at any business locations, whether or not such marks, names, or property are registered; (v) any item, instrument, property, claim, right, equipment, furniture, fixture, appliance, inventory, tool/or machinery or other asset associated with the Seller's businesses other than at the Locations; and (vi) those assets and properties of Seller listed on Exhibit 1.2. 1.3 Purchase Price; Noncompetition Payment. a. Price of Assets. The price to be paid for the assets to be sold and purchased pursuant to Sections 1.1b, 1.1c, 1.1d, 1.1e, 1.1f, 1.1g, 1.1h, and 1.1j shall be $23,000,000, allocated to the assets pursuant to Exhibit 1.8. b. Price of Inventory. To determine the price of the assets described in Section 1.1a (the "Propane Inventory), a physical inventory of propane in bulk storage, bobtails, in cylinders on trucks, and in customer tanks in the yard at the Locations shall be taken by representatives of Buyer and Seller as of the open of business on the Closing Date. The price to be paid shall be determined based upon the pricing information on 2 Exhibit 1.3b for that inventory (corrected to 60 degrees Fahrenheit based on the temperature of the propane in the vessel containing the greatest quantity) which Buyer and Seller so verify. c. Price of Accounts Receivable. To determine the price of the Purchased Accounts Receivable, Seller's total Purchased Accounts Receivable for the Operations shall be verified by representatives of Buyer and Seller as of the close of business on the day preceding the Closing Date by review of the business records. The price to be paid shall be the applicable percentage (as set forth below) of the amount of the Purchased Accounts Receivable; provided, however, that Buyer shall not be obligated to purchase any account (i) which is due from a customer that is at the time of such verification a debtor in bankruptcy or reorganization proceedings; or (ii) which otherwise appears to be uncollectible or unwanted as determined by Buyer in its sole discretion (the "Retained Accounts Receivable"). Account Receivable Age Percentage of Face Amount ---------------------- ------------------------- 0 - 30 days after statement date 100% 31 - 60 days after statement date 75% 61 - 90 days after statement date 50% over 90 days after statement date 0% d. Price of Appliances and Parts. The price for the assets described in Section 1.1k and 1.1l (parts and fittings and appliances, hereinafter "Appliance Inventory") shall be an amount equal to 90% of Seller's cost, determined by an inventory of said items at the Locations conducted jointly by Seller and Buyer on Closing Date. 1.4 Seller's Liabilities. a. Excluded Liabilities. Other than the assumed liabilities described in Section 1.4b, all liabilities, debts and obligations of every character or description, known or unknown, of Seller accruing or arising from acts (whether or not the resulting event or occurrence of damage is before, on or after the Closing Date), transactions or occurrences prior to the Closing (hereinafter defined) shall be Seller's sole obligation and responsibility and Buyer is not assuming any such liability, debt or obligation and Buyer shall have no responsibility therefor. b. Assumed Liabilities. Notwithstanding the above, Buyer agrees to assume and pay the liabilities and obligations (i) arising after the Closing Date with regard to the assigned leases, (ii) listed on Exhibit 1.4b, (iii) that arise on or after the Closing Date pursuant to executory contracts, orders and commitments that relate to the sale of equipment, merchandise or services of the Operations at the Locations, (iv) that are incurred with respect to, result from, are caused by or arise out of the assets acquired pursuant to Section 1.1, provided that Buyer does not assume any liability with respect to any asset or installation at a customer location until the earlier of (x) the date on which the Buyer first delivers propane into, services or inspects such asset and (y) 120 days after 3 the Closing Date. Buyer agrees that it shall bear all costs and expenses associated with the foregoing and that said costs and expenses shall be in addition to the purchase price of the assets. 1.5 Proration of Certain Items. Provided the Closing occurs, Buyer shall receive a credit with respect to the following items (the "Prorations"): (a) Real and Personal Property Taxes. With respect to the assets being transferred pursuant to this Agreement, Buyer will pay all real and personal property taxes, if any, (prorated as of the Closing Date) for the calendar year within which the Closing Date occurs, which are not payable until after the Closing Date. Buyer will make such payments as and when due and Buyer shall receive a credit for Seller's prorated share of the amounts to be paid by Buyer. (b) Customer Propane Prepayments or Level Payments. Customer prepayments for propane and level payment plan payments shall be prorated as of the Closing Date. Buyer shall receive a credit for the amount by which the retail price of gas provided to customers before the Closing is less than the retail amount paid to Seller by such customers. (c) Customer Tank Rent Prepayment. Prepayments of tank rent and all tank rent accounts receivable shall be prorated over the period to which the prepayment applies. Buyer shall receive a credit for the amount by which the prepayment of tank rent and tank rent accounts receivable exceeds the tank rent due through the end of the day prior to the Closing Date. (d) Customer Deposits and Balances. Buyer shall receive a credit for (i) all customer deposits made with Seller in connection with the use, lease or purchase of propane or propane tanks, cylinders, regulators or equipment and (ii) all customer credit balances of any kind. The foregoing items will be computed as of the time of the Closing and will be offset against the payment to be made by Buyer to Seller within three business days after the calculation of the Purchased Accounts Receivable, the Propane Inventory and Appliance Inventory, and the Prorations, as further described in Section 2.3. 1.6 Accounts Receivable Payments. Seller hereby irrevocably constitutes and appoints Buyer and any officer or agent thereof, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of Seller and in the name of Seller or in its own name, without notice to or assent by Seller, for the sole and exclusive purposes of signing, endorsing and negotiating any check, draft, deposit item or other instruments received by Buyer as a customer payment on the Purchased Accounts Receivable transferred or assigned hereunder. The power and authority granted to Buyer pursuant to this Section 1.6 shall expire 90 days after the Closing Date. Seller will immediately remit to Buyer any payments received by Seller on any Purchased Accounts Receivable transferred to 4 Buyer hereunder. Buyer will immediately remit to Seller any payments received by Buyer with respect to the Retained Accounts Payable. 1.7 Adjustments. a. As promptly as practicable, but no later than ten (10) days after the Closing Date, Seller shall cause to be prepared and delivered to Buyer the Closing Statement (as defined below) and a certificate based on such Closing Statement setting forth Seller's calculation of inventory price, Prorations, and Purchased Accounts Receivable ("Closing Adjustments"). The closing statement (the "Closing Statement") shall fairly present in all material respects calculation of the Closing Adjustments. b. If Buyer disagrees with Seller's calculation of Closing Adjustments delivered pursuant to Section 1.7a, Buyer may, within ten (10) days after delivery of the Closing Statement, deliver a notice to Seller disagreeing with such calculation and setting forth Buyer's calculation of such amount. Any such notice of disagreement shall specify those items or amounts as to which Buyer disagrees, and Buyer shall be deemed to have agreed with all other items and amounts contained in the Closing Statement and the calculation of Closing Adjustments delivered pursuant to Section 1.7a and shall pay those undisputed amounts within 10 days of delivery of the Closing Statement . c. If a notice of disagreement shall be duly delivered pursuant to Section 1.7b, Buyer and Seller shall, during the ten (10) days following such delivery, use their reasonable best efforts to reach agreement on the disputed items or amounts in order to determine, as may be required, the amount of Closing Adjustments. If during such period, Buyer and Seller are unable to reach such agreement, they shall promptly thereafter cause Ernst & Young (the "Accounting Referee") to review this Agreement and the disputed items or amounts for the purpose of calculating Closing Adjustments (it being understood that in making such calculation, the Accounting Referee shall be functioning as an expert and not as an arbitrator). In making such calculation, the Accounting Referee shall consider only those items or amounts in the Closing Statement and Seller's calculation of Closing Adjustments as to which Buyer has disagreed. The Accounting Referee shall deliver to Buyer and Seller, as promptly as practicable (but in any case no later than thirty (30) days from the date of engagement of the Accounting Referee), a report setting forth such calculation. Such report shall be final and binding upon Buyer and Seller. The cost of such review and report shall be borne equally by Buyer and Seller. d. Buyer and Seller shall, and shall cause their respective representatives to, cooperate and assist in the preparation of the Closing Statement and the calculation of Closing Adjustments and in the conduct of the review referred to in this Section 1.7, including, without limitation, the making available to the extent necessary of books, records, work papers and personnel. e. The Closing Adjustments remaining due, as finally determined by the process described in Section 1.7c, shall be paid within three (3) days of calculation by 5 wire transfer. The amount of any payment to be made pursuant to this Section 1.7e shall bear interest from and including the thirteenth day after the Closing Date to but excluding the date of payment at a rate per annum equal to the rate of interest = published from time to time by The Wall Street Journal as the "prime rate" at large U.S. money center banks during the period from the thirteenth day after the Closing Date to the date of payment. Such interest shall be payable at the same time as the payment to which it relates and shall be calculated daily on the basis of a year of three hundred sixty five (365) days and the actual number of days elapsed. 1.8 Purchase Price Allocation. The Buyer and Seller agree to allocate the aggregate purchase price among the purchased assets hereunder for all purposes (including financial accounting and tax purposes) as in accordance with the Allocation Schedule attached hereto as Exhibit 1.8. Buyer and Seller shall each report the federal, state and local income and other tax consequences of the transactions contemplated by this Agreement in a manner consistent with such allocation, including, without limitation, the preparation and filing of Form 8594 (or any successor form or successor provision of any future tax law) under Section 1060 of the Internal Revenue Code of 1986, as amended, with their respective federal income tax returns for the taxable year that includes the Closing Date, and neither Buyer nor Seller will take any position inconsistent with such allocation unless otherwise required by applicable law. II. CLOSING. 2.1 Closing Date. The consummation of the transactions contemplated by this Agreement (the "Closing") shall take place on January 9, 2004, or such earlier or later date as may be mutually agreeable and set by the parties (the "Closing Date"). The Closing shall be conducted by mail and deemed held at the offices of Cole, Schotz, Meisel, Forman & Leonard, P.A. Hackensack, New Jersey, at a time to be set by the parties. At the Closing, all actions taken and all documents delivered will be deemed to have been taken and delivered contemporaneously and no action will be taken nor any documents deemed delivered until all actions have been taken and all documents have been delivered. 2.2 Closing Deliveries by Seller. At the Closing, as a condition to the Closing for Buyer, Seller shall transfer and assign all of the properties and assets to be sold hereunder and shall deliver to Buyer a General Bill of Sale (as set forth in Exhibit 2.2.1), an Assignment of Customer Leases (as set forth in Exhibit 2.2.2), the Special and General Warranty Deeds (as set forth in Exhibit 2.2.3), an Assignment of Real Property Leases (as set forth in Exhibit 2.2.4), vehicle titles and such other appropriate instruments of transfer and physical possession as shall, in the reasonable opinion of counsel for Buyer, be effective to vest in Buyer good and marketable title to said properties and assets, including, but not limited to, releases of all outstanding security interests in the properties and assets being transferred (other than the Permitted Liens). Seller shall prepare a customer list based solely on its readily available computer files of all customers who have purchased inventory from the Locations during the fifteen (15) months preceding the Closing ("Customer List") and, at the Closing, transfer possession of such Customer List, accounts receivable records and all other records concerning the Operations at the Locations, 6 including, without limitation, all customer records at the Locations. Seller may retain historical records compiled at its corporate office. 2.3 Delivery and Payment by Buyer. At the Closing, Buyer will wire transfer: (i) to an account designated by Seller funds in the amount of $21,000,000 and (ii) to the U.S. Bank ("Escrow Agent") funds in the amount of $2,000,000 and will deliver to Seller resale exemption certificates in the form set forth in Exhibit 2.3a. Within three business days following the final calculation of the Purchased Accounts Receivable, the Propane Inventory, the Appliance Inventory, and the Prorations, and the Seller's and Buyer's execution of the final Closing Statement (substantially in the form of Exhibit 2.3 attached hereto) evidencing their agreement to the calculation of such amounts, Buyer will wire transfer to Seller the amount due pursuant to Section 1.3b (Propane Inventory), Section 1.3c (Purchased Accounts Receivable) and Section 1.3d (Appliance Inventory), less any credits due Buyer under Section 1.5 (Prorations) or otherwise. On the first anniversary date of the Closing, Escrow Agent shall wire transfer to the Seller the amount of $2,000,000, less any amount that is not subject to disbursement or is payable to Buyer pursuant to the Escrow Agreement. 2.4 Further Assurances. Without further consideration, Seller or Buyer, as the case may be, will at any time, and from time to time, execute and deliver such further instruments of transfer or assignment and take such other action as Buyer or Seller, as the case may be, reasonably may request to give effect to the transactions contemplated by the terms of this Agreement. 2.5 Procedures Pending Closing. Between the date of this Agreement and the Closing Date: a. Access. Seller will give to Buyer and Buyer's representatives reasonable access during normal business hours to Seller's properties, books, records, and personnel files related solely to the Operations, and will allow such persons to make copies (at Buyer's expense) of all of such documents and all such financial and operating data and information as any such person shall reasonably request from time to time, provided, that no such access shall be requested or required to be given at any time or in any manner which interferes with the normal conduct of Seller's business. All such documents, data, and other materials are confidential and Buyer shall not release them to anyone except its employees and agents, and then only for the purposes of this transaction; provided, however, that any such documents, data, or other materials shall not be deemed confidential for purposes of this paragraph to the extent that the same (1) is a part of the public domain at the time of disclosure, (2) subsequently becomes a part of the public domain by publication or otherwise through no fault of Buyer or its representatives, (3) may be shown by Buyer to have been contained in a writing in its possession at the time of disclosure, which information had not been wrongfully acquired, directly or indirectly, from Seller and Buyer is not under an obligation of confidentiality with respect thereto, or (4) is subsequently disclosed to Buyer by a third party not in violation of any rights of, or obligations to, Seller. Such examination and investigation by Buyer shall not operate as a waiver of, or limit in any way, the warranties and representations of Seller hereunder. If for any reason the transactions contemplated by 7 this Agreement are not consummated, then upon Seller's written request Buyer shall return to Seller (and not thereafter use in its own business or otherwise, or disclose the contents of) all documents, data and other materials respecting Seller's business furnished to or obtained by Buyer or its representatives from Seller or its representatives. b. Conduct of Business. Without the prior written consent of Buyer and solely with respect to the Operations: (1) Seller will not sell or otherwise dispose of, or purchase or acquire any assets at the Locations in any manner, except in the ordinary course of business; (2) Seller will not make, accrue, or become liable in any way for any bonus, profit sharing, pension or incentive compensation payments to any employee of Seller other than in conformity with arrangements existing on or before November 24, 2003; (3) Seller will not make or enter into any material agreement providing for any change in rates of wages or salaries or employment benefits or term or duration of employment of any employee of Seller; (4) Seller will carry on its business in the same manner as heretofore conducted and will not take any action or enter into any contracts other than in conformity with prior practice in the ordinary and regular course of business as heretofore conducted; and (5) Seller will use commercial good faith to maintain and preserve the Operations, consistent with past practice.. 2.6 Verification of Tanks. During the period commencing on the Closing Date and ending June 30, 2004 (the "Verification Period"), Buyer shall use commercially reasonable efforts to locate and verify (a) the quantity and sizes of the tanks and cylinders as listed on Exhibit 1.1b (b) ownership of the tanks and cylinders, and (c) proper identification (i.e., data plates) with respect to the tanks and cylinders. At the end of the Verification Period, Buyer shall submit to Seller a report (x) of all tanks and cylinders that cannot be located and/or verified by Buyer, (y) with respect to which ownership is being contested by a customer or other third party and (z) that do not have proper identification as required by applicable laws or regulations, in each case, within the Verification Period (the "Verification Report"). If Seller is unable to resolve any claim by Buyer with respect to a tank or cylinder included in the Verification Report within the thirty (30) day period following the Seller's receipt of the Verification Report, Seller shall, at its option, (1) pay to Buyer the replacement value of such tanks and cylinders in accordance with the replacement costs set forth on Exhibit 2.6 or (2) provide Buyer with replacement tanks and cylinders, which shall be equivalent in size, in good condition and otherwise in accordance with Exhibit 1.1b. In the event that Seller pays the replacement value or replaces an unverified or missing tank or cylinder, Seller shall be assigned all of Buyer's 8 ownership interest in the unverified or missing tank or cylinder, and Buyer shall notify Seller if such unverified or missing tank is located. 2.7 Closing Date Receipts. Provided the Closing occurs, the proceeds resulting from the Operations conducted on the Closing Date shall accrue to the benefit of and be deemed to be the property of Buyer. This Section does not affect in any way the liabilities of Seller referenced in Section 1.4a. III. REPRESENTATIONS AND WARRANTIES. 3.1 Representations and Warranties of Seller. Seller represents, warrants and agrees to and with Buyer as follows: a. Organizational Status. SP is a limited partnership, and SSS is a corporation, both duly organized, validly existing and in good standing under the laws of the state of Delaware and have full power and authority to carry on their business as presently conducted and to own and operate their assets, properties and business. SP and SSS are qualified to do business and are in good standing under the laws of the states of Texas, Oklahoma, Missouri and Kansas. Seller has full power and authority to execute this Agreement and carry out its obligations hereunder. b. Financial Information. Seller has delivered to Buyer copies of certain information (including financial information, operational data and sales information), copies of which are attached as Exhibit 3.1b hereto, relating to Seller's Operations ("Financial Information"). The Financial Information represents fairly the financial position of the Operations as of the dates thereof and the information included in the Financial Information presents fairly and accurately the financial and operational results of the Operations for the periods referred to therein, all prepared on a basis consistent with prior periods. c. Changes During Preceding Year. Except as set forth on Exhibit 3.1c, during the year preceding the date hereof, with respect to the Operations there has not been: (1) Any material change, financial or otherwise, in the condition of the properties, assets, liabilities, prospects or business, except normal and usual changes in the ordinary course of business or changes disclosed in the Financial Information, which have not in the aggregate been adverse to the Operations at the Locations; (2) Any damage, destruction or loss (whether or not covered by insurance) suffered by Seller in an aggregate amount exceeding $10,000; (3) Any sale, lease, abandonment or other disposition by Seller of any interest in any real property, or, except in the ordinary course of business, 9 in any machinery, equipment or other operating property, or any lease or sale of any propane tanks owned by Seller; (4) Any other occurrence, event or condition which materially and adversely affects or, to Seller's knowledge, is likely to materially and adversely affect the Operations; or (5) Any material and adverse change in the Financial Information. d. Personal Property. Except for the leased assets listed on Exhibit 3.1d (including the real property leases and vehicle leases), Seller owns and has good and marketable title to the personal and intangible property to be sold to Buyer hereunder including, without limitation, the propane tanks, equipment, vehicles and other assets described on Exhibit 1.1b. Except for the Permitted Liens, none of the personal property and assets to be transferred to Buyer pursuant to this Agreement at the Closing are subject to any contract of sale, encumbrance, security agreement, lien or charge of any kind or character. Except for the leased assets, no person, corporation or firm other than Seller has any ownership interest in the personal property being transferred pursuant to this Agreement. All appliances and other equipment installed by Seller, and the propane tanks, cylinders, regulators, vehicles and other equipment transferred hereunder, are in working order and are in compliance with all applicable safety regulations. The assets listed on Exhibit 1.1b attached hereto along with the leased assets are sufficient to enable Buyer to continue to conduct the Operations in the ordinary course of business, consistent with past practices. "Permitted Lien" means, as to real property, Permitted Real Estate Liens, and, as to all other property, (i) any lien for taxes not yet due or delinquent or being contested in good faith by appropriate proceedings, (ii) any statutory lien arising in the ordinary course of business by operation of law with respect to a liability that is not yet due or delinquent, AND (iii) any other lien which individually or in the aggregate with other such liens could not reasonably be expected to materially impair the use or value of the asset to which it attaches. e. Real Property. The Special and General Warranty Deeds attached hereto as Exhibit 2.2.3 set forth a complete legal description of each parcel of real property owned by Seller and used in the Operations. Seller has good and marketable title in fee simple absolute to such real property and to the improvements thereon, free and clear of all liens, security interests, leases, encumbrances, easements, covenants, restrictions, defects or other burdens, except for Permitted Real Estate Liens. The transfer of such real property will pass to Buyer good and marketable fee simple title and full entitlement to the use and enjoyment of each parcel being transferred. Seller does not own, and the real property described in the General Warranty Deeds attached hereto as Exhibit 2.2.3 does not contain, any Underground Storage Tanks. "Permitted Real Estate Liens" means (i) statutory liens for current taxes or other governmental charges with respect to the real property (x) not yet due and payable or (y) with respect to which Seller retains all liability and the amount or validity of which is being contested in good faith by appropriate proceedings by Seller; (ii) mechanics', carriers', workers', repairers' and 10 similar statutory liens arising or incurred in the ordinary course of business for amounts which are not delinquent and which are not, individually or in the aggregate, material to the business Locations; (iii) zoning, entitlement, building and other land use regulations imposed by governmental agencies having jurisdiction over the real property which are not violated by the current use and operation of the real property; and (iv) covenants, conditions, restrictions, easements and other matters or record affecting title to the real property which do no materially impair the use or value of the affected parcel of real property for the purposes for which it is used in connection with the applicable Location. f. Other Contracts and Encumbrances. Except as disclosed on Exhibit 3.1f, Seller is not a party to any written or oral (i) contract not made in the ordinary course of business, (ii) franchise agreement, (iii) chattel mortgage, equipment lease, security agreement or conditional sales contract or (iv) partnership, joint venture or other business agreement with respect to the Operations, in each case where the consideration to be paid or received by Seller exceeds $5,000 or which cannot be terminated by Seller upon notice of thirty (30) or fewer days without penalty. Seller has performed all obligations and is not in default in any respect under any contract to which Seller is a party. Attached hereto as Exhibit 3.1f is a listing of, and Seller has provided complete copies of, all contracts and agreements to which Seller is a party for the future sale by Seller of propane for a fixed or capped price, or in volumes in excess of 5,000 gallons per year. g. Taxes. Seller has filed all income tax returns and all real and personal property tax returns required to have been filed, and has paid all taxes as shown on said returns, all assessments received by it and all amounts due any governmental authority to the extent that such taxes, assessments and amounts have become due. h. Restrictions. Seller is not subject to any restriction contained in any charter, articles of incorporation, bylaw, mortgage, lien, lease, agreement, instrument, order, judgment or decree, which would prevent the consummation of the transactions contemplated by this Agreement. i. Easements. Seller has all easements and rights of ingress and egress necessary for the conduct of the Operations, for placement of its propane tanks, and all easements for utilities and services necessary for the conduct of the Operations on the real property to be sold to or leased by Buyer pursuant to this Agreement. The transfer, conveyance and assignment by Seller to Buyer at the Closing of the property and rights described in Section 1.1 will pass to Buyer good and marketable title to such property, together with all necessary easements and rights of ingress and egress associated therewith. Seller expressly represents and warrants that it will execute and deliver any additional deeds, instruments or documents required to convey to Buyer all easements necessary for the lawful conduct of the Operations at the Locations (including, without limitation, placement of all equipment and tanks on Seller's property) in the manner in which such Operations were conducted on the last business day before the Closing. 11 j. Litigation. Except as set forth on Exhibit 3.1j, Seller is not engaged in, or to its knowledge threatened with, any legal action or other proceeding before any court or administrative agency, has not been charged with, and to its knowledge is not under investigation with respect to any charge concerning, any material violation of any provision of federal, state or local law or administrative regulation in respect of or affecting either the property and assets conveyed hereunder or the Operations. k. Employees. Seller has not made any representations to its employees with respect to any undertaking or commitment by Buyer to continue the employment of such employees. None of Seller's employees at the Locations is or has been subject to any union, labor or collective bargaining agreement nor have there been any demands for such an agreement. Seller has no liability under the Employee Retirement Income Security Act, the National Labor Relations Act, the Fair Labor Standards Act, the Civil Rights Act, the Equal Employment Opportunity Act or any other social, employment or labor law affecting Seller which is not being retained by Seller as Seller's obligation. Seller has no accrued liability to any employee for wages, fringe benefits or otherwise which is not being retained by Seller as Seller's obligation. l. Environment. (1) With respect to the Operations and except as disclosed on Exhibit 3.1l, Seller is in full compliance with all aspects of each (i) federal, state or local law relating to pollution or the environment, including but not limited to laws relating to emissions, discharges, releases or threatened releases of pollutants, contaminants, chemicals or industrial, toxic or hazardous substances or wastes (collectively "Hazardous Wastes") into the environment or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transportation or handling of Hazardous Wastes (collectively "Environmental Laws"); and (ii) regulation, code, plan, order, decree, judgment, injunction, notice or demand letter issued, entered, promulgated or approved pursuant to or in connection with any Environmental Laws (which collectively with Environmental Laws are hereinafter referred to as "Environmental Laws and Regulations"). With respect to the Operations and except as disclosed on Exhibit 3.1l, there is no civil, criminal, administrative or other action, suit, demand, claim, hearing, notice of violation, investigation, proceeding, notice or demand letter pending, received or, to the knowledge of Seller, threatened against Seller relating in any way to Environmental Laws and Regulations. (2) With respect to the Operations and except as disclosed on Exhibit 3.1l, during the period of ownership, leasehold interest or operation by Seller or its affiliates with respect to such parcel of Transferred Property there have occurred no and there are no anticipated, releases or substantial threats of a release of any Hazardous Wastes, from or onto any Transferred Property (as defined below) which release or threatened release is or may be subject to regulation under Environmental Laws and Regulations. Without limiting the 12 foregoing, no asbestos fibers or materials or polychlorinated biphenyls (PCBs) are on or in any Transferred Property. None of the Transferred Property has previously been used, is now being used or is contemplated to be used for the generation, transportation, treatment, storage, abatement or disposal of any Hazardous Wastes subject to regulation under Environmental Laws and Regulations. "Transferred Property" means any Location which (i) is currently owned, leased or utilized by Seller and (ii) which Buyer is purchasing, leasing, assuming the existing lease or otherwise obtaining the right to utilize such property in connection with the transactions contemplated by this Agreement. (3) With respect to each parcel of Transferred Property and except as disclosed on Exhibit 3.1l, during the period of ownership, leasehold interest or operation by Seller or its affiliates with respect to such parcel of Transferred Property, there have occurred no conditions, circumstances, activities, practices, incidents, actions or plans which may give rise to any common law or legal liability, or otherwise form the basis of any claim, action, demand, suit, proceeding, hearing, notice of violation, study or investigation, based on or related to the manufacture, generation, ownership, possession, distribution, use, treatment, abatement, storage, disposal, transportation or handling, or the emission, discharge, release or threatened release into the environment of any Hazardous Wastes. For purposes of this Section 3.1, the affiliates of Seller shall be defined as: Suburban Propane, a division of Quantum Chemical Corporation; Quantum Chemical Corporation; Hanson PLC; and Millennium Petrochemicals, Inc. m. Licenses and Permits. Seller and its employees have all material licenses, permits and approvals required under federal law, the laws of the states of Texas, Oklahoma, Missouri and Kansas, or any local or regional governmental authority to conduct the business of Seller at all Locations. Seller will cooperate with Buyer in transferring to Buyer or its employees those licenses, permits or approvals which may be transferable. Seller has no knowledge of any facts or occurrences which constitute violations of any licensing, permit or other laws to which Seller, its employees or the Operations are subject. n. Compliance with Law and Applicable Government Regulations. With respect to the Operations, Seller has not previously failed nor is currently failing to comply with any applicable federal, state or local law or regulation, including without limitation, any energy, antitrust, health and safety or Environmental Laws and Regulations. With respect to the Operations, there are no proceedings of record, no proceedings are pending or to Seller's knowledge threatened, nor has Seller received any written notice regarding any violation of any law, ordinance, requirement, order, rule or regulation enforced by any governmental agency or other entity (federal, state or local) claiming jurisdiction over Seller, including without limitation, any requirement of OSHA or any pollution and/or environmental control agency. 13 o. Insurance. Seller maintains in effect insurance covering Seller's Operations and any liabilities relating thereto in an amount believed adequate by Seller, and such insurance coverage shall be maintained by Seller through the Closing Date. The products liability and personal injury insurance maintained by Seller has been on an "occurrence" basis during the six-year period prior to the Closing Date. Seller has previously delivered to Buyer a true and complete schedule of its general liability insurance policies. p. Authorization. This Agreement and all documents and actions required to consummate the transactions contemplated hereby have been duly approved and authorized by the SP's Board of Supervisors and SSS's Board of Directors. q. Brokerage Fees and Expenses. Seller has no liability for brokerage fees or other commissions relative to this Agreement, or to the transactions contemplated hereby. r. Exhibits Correct. The exhibits and schedules attached hereto are true, complete and accurate as of the date hereof and Seller shall notify Buyer of all changes in such information in writing at the Closing so that such exhibits and schedules will be true, complete and correct as of the Closing Date. s. Warranties Correct, Etc. The representations and warranties of Seller contained in this Agreement or otherwise made in writing in connection with the transactions contemplated by this Agreement shall be true on and as of the Closing Date with the same effect (except as to transactions contemplated by this Agreement) as though such representations and warranties had been made on and as of such date, and each and all of the agreements and conditions to be performed or observed by Seller on or before the Closing Date pursuant to the terms hereof shall have been duly performed or observed. t. Disclaimer of other Representations and Warranties. Except as expressly set forth in this Section 3.1 or otherwise provided in this Agreement, Seller makes no representation or warranty, express or implied, at law or in equity, including any representation or warranty in respect of the Operations or the assets transferred or the liabilities assumed, or the MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE of the acquired assets and any such other representations or warranties are hereby expressly disclaimed. 3.2 Representations and Warranties of Buyer. Buyer represents, warrants and agrees to and with Seller as follows: a. Organizational Status. Buyer is a limited partnership duly organized, validly existing and in good standing under the laws of the state of Delaware and has the power and authority to own its property and to carry on its business as 14 presently conducted. Buyer has full power and authority to execute this Agreement and carry out its obligations hereunder. b. Restrictions. Buyer is not subject to any restriction contained in any charter, partnership agreement, mortgage, lien, lease, agreement, instrument, order, judgment or decree, which would prevent the consummation of the transactions contemplated by this Agreement. c. Authorization. This Agreement and the transactions contemplated hereby have been duly approved and authorized by all necessary corporate action of the Board of Directors of Buyer's general partner. d. Brokerage Fees and Expenses. Buyer shall indemnify Seller and hold Seller harmless against and in respect of any claim for brokerage fees or other commissions incurred or owing by Buyer relative to this Agreement, or to the transactions contemplated hereby, and also in respect of all expenses of any character incurred by Buyer in connection with this Agreement or such transactions. e. Investigation by Buyer. Buyer acknowledges that except for Seller's express representations and warranties set forth in this Agreement, Buyer is relying upon Buyer's own independent investigation of the assets acquired hereunder and liabilities assumed in entering into this Agreement. In entering into this Agreement, Buyer has relied solely upon the express representations, warranties and covenants of Seller set forth in Section 3 hereof and Buyer's own investigation and analysis. Buyer further acknowledges, that except as expressly set forth in the representations and warranties in Section 3 there are NO EXPRESS OR IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. f. Warranties Correct, Etc. The representations and warranties of Buyer contained in this Agreement or otherwise made in writing in connection with the transactions contemplated by this Agreement shall be true on and as of the Closing Date with the same effect as though such representations and warranties had been made on and as of such date. 15 IV. CONDITIONS TO CLOSING. 4.1 Conditions to Buyer's Obligations. If, for any reason whatsoever, the following conditions are not satisfied (or waived by Buyer) by the Closing, then Buyer, at its option, may terminate this Agreement without further obligation to Seller (other than for confidentiality, return of Seller confidential information, liability for any prior breach of the Agreement and those other provisions of this Agreement intended to survive): a. Documents. Seller shall have furnished Buyer with all documents, certificates and other instruments required to be furnished by Seller pursuant to the terms of this Agreement, including without limitation, the Customer List, vehicle titles, and certified copies of resolutions duly adopted by the SP's Board of Supervisors and SSS's Board of Directors authorizing all action necessary to enable Seller to comply with the terms of this Agreement. b. No Actions or Proceedings. No material action or proceeding against Seller which is adverse to the Operations shall have been instituted or, to the knowledge of Seller, threatened before a court or other governmental body or instituted or threatened by any public authority. c. Title Insurance. Buyer shall obtain a commitment for title insurance evidencing the obligation of a title insurer to insure merchantable fee simple title in Buyer subject to Permitted Real Estate Liens, as of the Closing Date, to the real property described in the deeds attached hereto as Exhibit 2.2.3, and Buyer's reasonable objections to the state of title shown on such commitment shall have been satisfied. d. No Material Adverse Change. No material adverse change in the amount or condition of the properties, assets, liabilities or business of Seller with respect to the Operations at the Locations, taken as a whole, shall have occurred during the period between the date of execution hereof and the Closing. e. Representations, Warranties, Etc. The representations and warranties of Seller hereunder shall be true when made and shall be true in all material respects at the Closing Date as though such representation and warranty had been made on the Closing Date, and Seller shall have substantially performed all covenants and agreements on its part required to be performed, and shall not be in default under any of the provisions of this Agreement, at the Closing Date. 4.2 Conditions to Seller's Obligations. If, for any reason whatsoever, the following conditions are not satisfied (or waived by Seller) by the Closing, then Seller, at its option, may terminate this Agreement with no further obligation to Buyer (other than for confidentiality, liability for any prior breach of the Agreement and those other provisions of this Agreement intended to survive): 16 a. Deliveries. Buyer shall have furnished Seller with all documents, payments, certificates and other instruments required to be furnished to Seller by Buyer pursuant to the terms of this Agreement. b. Representations, Warranties, Etc. Each and every representation and warranty of Buyer hereunder shall be true in all material respects at the Closing Date as though such representation and warranty had been made on the Closing Date, and Buyer shall have substantially performed all covenants and agreements on its part required to be performed, and shall not be in default under any of the provisions of this Agreement, at the Closing Date. V. FURTHER AGREEMENTS. 5.1 Survival of Representations and Warranties; Indemnity. a. Warranty Survival. All of the representations and warranties of the Seller contained in Sections 3.1b, 3.1c, 3.1d, 3.1e, 3.1f, 3.1h, 3.1i, 3.1j, 3.1k, 3.1m, 3.1n, 3.1o, 3.1q, 3.1r, and 3.1s above shall survive the Closing Date and continue in full force and effect for a period of eighteen (18) months thereafter. All of the representations and warranties of the Seller contained in Section 3.1g above shall survive the Closing Date and continue in full force and effect for a period of five (5) years thereafter. All of the representations and warranties of Seller contained in Section 3.1l above shall survive the Closing Date and continue in full force and effect for a period of three (3) years thereafter. All of the covenants and the other representations and warranties of the parties contained in this Agreement shall survive the Closing Date and continue in full force and effect forever thereafter (subject to any applicable statutes of limitations). b. Seller Indemnification. Seller will indemnify and hold Buyer, Buyer's directors, officers and employees harmless against any loss, cost, liability or expense (including, without limitation, costs and expenses of litigation and reasonable attorneys' fees) (hereinafter "Damages") incurred or suffered by Buyer or any affiliate of Buyer as a result of (i) the incorrectness or breach of any of the representations, warranties, covenants or agreements of Seller contained in this Agreement or given on the Closing Date or (ii) the assertion against Buyer of any liability of Seller; provided, however, that the Seller shall not have any obligation to indemnify the Buyer from and against any Damages resulting from, arising out of, relating to, in the nature of, or caused by (A) the breach of any such representation or warranty listed above until the Buyer has Damages by reason of all such breaches in excess of a $250,000 aggregate threshold (at which point the Seller will be obligated to indemnify the Buyer from and against all such Damages relating back to the first dollar), or for Damages in excess of a maximum aggregate of $5,000,000, or (B) the breach of the representations or any violation of Environmental Laws and Regulations except caused by the Operations or, with respect to the Transferred Properties, which occurred during the period of ownership, leasehold interest or operation by Seller or its affiliates. Without limiting the remedies available to Buyer to enforce the indemnities provided by this Section 5.1 and subject to the Escrow 17 Agreement, Seller agrees that the amount of any Damages suffered by Buyer may be credited and set off against any sums of money at any time or from time to time payable or deliverable by Buyer or its successors to Seller. Individual Damages of less than $5,000 shall not be subject to indemnification and shall not count toward the aggregate threshold or the maximum aggregate. Seller shall have a further duty to indemnify Buyer for Damages incurred or suffered by Buyer arising out of or with respect to the environmental conditions listed on Exhibit 3.1l (to the extent the event or condition arose or occurred during the period of ownership, leasehold interest or operation by Seller or its affiliates) and the litigation listed on Exhibit 3.1j, subject to the aggregate threshold, maximum aggregate and individual Damages threshold set forth above. c. Buyer's Indemnification. Buyer will indemnify and hold Seller and Seller's directors, officers, and employees harmless against any Damages incurred or suffered by Seller or affiliate of Seller as a result of or arising from (i) the incorrectness or breach of any of the representations, warranties, covenants and agreements of Buyer contained in this Agreement or given on the Closing Date; or (ii) any Assumed Liability. 5.2 Indemnification Procedures a. In the event that any legal proceedings shall be instituted or that any claim or demand ("Claim") shall be asserted by any third person in respect of which payment may be sought under Section 5.1 hereof, the indemnified party shall reasonably and promptly cause written notice of the assertion of any Claim of which it has knowledge which is covered by this indemnity to be forwarded to the indemnifying party. The indemnifying party shall have the right, at its sole option and expense, to be represented by counsel of its choice (which must be reasonably satisfactory to the indemnified party), and to defend against, negotiate, settle or otherwise deal with any Claim which relates to any Damages indemnified against hereunder. If the indemnifying party elects to defend against, negotiate, settle or otherwise deal with any Claim which relates to any Damages indemnified against hereunder, it shall within five (5) days (or sooner, if the nature of the Claim so requires) notify the indemnified party of its intent to do so. If the indemnifying party elects not to defend against, negotiate, settle or otherwise deal with any Claim which relates to any Damages indemnified against hereunder, fails to notify the indemnified party of its election as herein provided or contests its obligation to indemnify the indemnified party for such Damages under this Agreement, the indemnified party may defend against, negotiate, settle or otherwise deal with such Claim. If the indemnified party defends any Claim, then the indemnifying party shall reimburse the indemnified party for the costs and expenses (including reasonable attorneys' and other professionals' fees and expenses) of defending such Claim upon submission of periodic bills. If the indemnifying party shall assume the defense of any Claim, the indemnified party may participate, at his or its own expense, in the defense of such Claim; provided, however, that such indemnified party shall be entitled to participate in any such defense with separate counsel at the expense of the indemnifying party if, (i) so requested by the indemnifying party to participate or (ii) in the reasonable opinion of counsel to the indemnified party, a conflict or potential conflict exists between the indemnified party and the indemnifying party that would make such separate 18 representation advisable; and provided, further, that the indemnifying party shall not be required to pay for more than one such counsel for all indemnified parties in connection with any Claim. The parties agree to cooperate fully with each other in connection with the defense, negotiation or settlement of any such Claim. b. In the case of a Claim brought by a third party, the party to be indemnified shall be reimbursed for any legal or other expenses reasonably incurred by the party to be indemnified in connection with investigating or defending any such Claim as such expenses are incurred. In the case of a Claim brought by Seller against Buyer, or by Buyer against Seller, after any final judgment or award shall have been rendered by a court, arbitration board or administrative agency of competent jurisdiction and the expiration of the time in which to appeal there from, or a settlement shall have been consummated, or Buyer and Seller shall have arrived at a mutually binding agreement with respect to such a Claim, the indemnified party shall forward to the indemnifying party notice of any sums due and owing by the indemnifying party pursuant to this Agreement with respect to such matter and the indemnifying party shall be required to pay all of the sums so due and owing to the indemnified party by wire transfer of immediately available funds within 10 business days after the date of such notice. c. No settlement of any Claim may be made by the indemnifying party without the consent of the indemnified party unless such settlement releases the indemnified party from any liability in respect thereof and does not include any admission of culpability on the part of the indemnified party. d. In the event that an indemnified party should have a claim against the indemnifying party hereunder which does not involve a claim or demand being asserted by a third party, the indemnified party shall send a written notice with respect to such claim to the indemnifying party. The indemnifying party shall have 10 days from the date such notice is delivered during which to notify the indemnified party in writing of any good faith objections it has to the indemnified party's notice or claims for indemnification, setting forth in reasonable detail each of the indemnifying party's objections thereto. If the indemnifying party does deliver such written notice of objection within such 10-day period, the indemnifying party and the indemnified party shall attempt in good faith to resolve any such dispute within 10 days of the delivery by the indemnifying party of such written notice of objection. 5.3 Indemnification as Sole Remedy. Except in connection with fraud or specific performance, Buyer acknowledges that the indemnification provisions contained in this Section 5 constitute Buyer's sole and exclusive remedy with respect to any claims or disputes arising out of or in connection with the Agreement. 5.4 Covenants Against Competition. a. Seller agrees that Seller, and Seller's affiliates and officers will not (i) for the period commencing on the Closing Date and ending five years after such date, reveal, make known or use, directly or indirectly, any confidential business information 19 (including without limitation, customer lists and records) sold to Buyer pursuant to this Agreement, nor (ii) for the period commencing on the Closing Date and ending three years after such date, within a 50-mile radius of the location of any of Seller's Operations in Texas, Oklahoma, Missouri or Kansas, directly or indirectly (whether as owner, director, shareholder (with the exception of beneficial ownership by such persons or entities, individually and in the aggregate, of not more than five percent of the outstanding equity securities of any publicly held corporation), employee, officer, agent, broker, dealer, representative or in any other capacity), (a) solicit, market or provide or attempt to market or provide to any person or entity either propane, tanks, cylinders or any other products or services associated with the Operations, (b) divert or attempt to divert from Buyer any business with any customer or account with which Seller had any contact or association, which was under the supervision of Seller, or the identity of which was learned by Seller as a result of conducting the Operations, (c) induce any salesperson, distributor, manufacturer, representative, agent, jobber or other person transacting business with Buyer at the Locations to terminate his, her or its relationship or association with Buyer, or to represent, distribute or sell services or products in competition with the services or products of Buyer, (d) induce or cause any employee of Buyer at the Locations to leave the employ of Buyer or (e) lend money to, invest in or otherwise assist in any manner any individual or entity engaged in activities described in (a), (b), (c) or (d) above. Notwithstanding the preceding, the restrictions of this Section 5.4 shall not be construed in any manner to prohibit or restrict the Seller, from directly or indirectly (i) acquiring all or substantially all of the assets or capital stock of any of the entities listed on Exhibit 5.4, or their successors or assigns. Recognizing the irreparable nature of the injury which would be caused Buyer by violation of this Section 5.4, Seller agrees that in addition to and without limitation of any rights which Buyer might have hereunder, any violation of this Section 5.4 shall be the proper subject matter for immediate injunctive relief and Buyer shall have the right to offset any Damages it might have incurred by reason of any breach hereof against any sums of money at any time deliverable by Buyer or its successors to Seller subject to the Escrow Agreement. b. If any covenant, undertaking or other provision of Section 5.4a hereof shall be determined to be invalid, illegal or incapable of being enforced by reason of any rule of law or public policy, all other covenants, undertakings and provisions of such Section shall nevertheless remain in full force and effect and shall be deemed separable and divisible from all other covenants, undertakings and provisions thereof and none shall be deemed to be dependent upon any other unless so expressed herein. If any provision of such Section relating to time periods or geographical area is found by a court of competent jurisdiction to exceed the maximum time period or geographical area such court deems reasonable and enforceable, the parties agree that such court may enforce such provisions for the maximum time period and/or geographical area as the court finds to be reasonable. 5.5 Retained Access. Following the Closing, to the extent reasonably required for any bona fide business purpose, Buyer will allow, and will use its reasonable efforts to cause its affiliates to allow, Seller (and Seller's agents, representatives and affiliates) access to all business records concerning the Operations, the acquired assets hereunder or the Assumed 20 Liabilities which relate to the period prior to the Closing Date and will permit such person to make copies of same. Such access will be granted upon reasonable advance notice, during normal business hours, and in such a manner so as not to interfere unreasonably with the operations of the Business. Without limiting the generality of the foregoing, if either Buyer or Seller or any of its affiliates actively is contesting or defending against any charge, complaint, action, suit, proceeding, hearing, investigation, claim or demand in connection with (a) any transaction contemplated hereby, or (b) any fact, situation, circumstances, status, condition, activity, practice, plan, occurrence, event, incident, action, failure to act, or transaction on or prior to the Closing relating to the Operations, then the other party will cooperate, and use its reasonable efforts to cause its affiliates to cooperate, with the contesting or defending party and its counsel in such contest or defense, make available such other party's and its affiliates' personnel and provide such testimony and access to books and records as are reasonably requested in connection with such contest or defense, all at the contesting or defending party's expense. 5.6 Taxes. Buyer shall be solely responsible for the payment of any sales or transfer or other taxes as may be required to paid in connection with the transactions provided for herein, together with all documentary, filing and recording taxes, fees and charges associated with the transactions contemplated by this Agreement. All personal property and other taxes and assessments based upon or measured by the ownership of property, or the receipt of proceeds therefrom, shall be prorated between Seller and Buyer as of the Closing Date; provided, however, that each party shall be responsible for its own income and franchise taxes. Seller may require Buyer to remit any and all applicable taxes to Seller; under these circumstances, Seller shall be responsible for remitting said taxes to the appropriate taxing authorities. 5.7 Employees. Except as set forth on Exhibit 5.7, Buyer agrees to extend offers of employment to all employees of Seller who shall be working as of the Closing Date at any of the Locations and who meet Buyer's employment qualifications and criteria, and shall employ such employees who accept such offers ("Hired Employees") at no less than the same wage or salary rate in effect and on other terms, conditions, and benefits as are provided to similarly situated employees of the Buyer. 5.8 Name Change; Use of Seller's Name. Buyer shall remove the name and logo of Seller from the assets at the Locations within a commercially reasonable time, but in no event later than ninety (90) days after the Closing for primary locations, and at secondary locations and customer locations six (6) months after the Closing, at Buyer's sole cost and expense. From and after the Closing, Buyer shall use only Buyer's own name when taking action in respect of the Operations or in connection with any Location. Buyer shall not state, represent or imply that Buyer is connected in any manner with, or acting for or on behalf of, Seller or any of Seller's affiliates. Buyer shall not (a) use the marks and/or names of, or otherwise refer to Seller or any of Seller's affiliates or (b) use any names and/or marks similar to the names and/or marks of any Seller or any of Seller's affiliates. 5.9 Confidential Information. The parties acknowledge and agree that the Confidentiality Agreements dated February 26, 2003 and April 4, 2003 between Seller as "Discloser" and Buyer as "Disclosee" remain in full force and effect and shall survive the 21 termination of this Agreement, but shall not survive the Closing, and if Closing occurs, shall be null and void thereafter. 5.10 Public Announcements. All public announcements prior to and on the Closing Date relating to this Agreement or the transactions contemplated hereby, including announcements to employees, will be made only as may be agreed upon jointly by the parties hereto; provided, however, that Buyer or Seller may make any public disclosure it believes in good faith is required by applicable law or stock exchange requirement (in which case the disclosing party will use its reasonable best efforts to advise the other party prior to making the disclosure).. 5.11 Notices. Any notice, request, instrument or other document to be given hereunder shall be in writing and delivered personally or sent by certified or registered mail, postage prepaid: If to Buyer, addressed as follows: Ferrellgas, L.P. c/o Ferrellgas, Inc. One Liberty Plaza Liberty, Missouri 64068 Attention: Kenneth A. Heinz, Sr. Vice President, Corporate Development with a copy to: Bryan Cave LLP 1200 Main Street, Suite 3500 Kansas City, Missouri 64105 Attention: Morris K. Withers, Esq. If to Seller, addressed as follows: Suburban Propane, L.P. 240 Route 10 West, P.O. Box 206 Whippany, NJ 07981 Attention: Janice Meola, Esq. with a copy to: Cole, Schotz, Meisel, Forman & Leonard, P.A. Court Plaza North 25 Main Street Hackensack, NJ 07601 Attention: Alan Rubin, Esq. 22 or to such other address as any of the parties hereto may designate by notice given as above provided. Any item sent by registered or certified mail, as above provided, will be deemed given when deposited in the United States mails. 5.12 Risk of Loss. Seller shall bear the risk of loss or damage to the properties and assets to be sold hereunder until the Closing. 5.13 Bulk Sales Law. Buyer waives compliance by Seller with the provisions of any applicable bulk sales, fraudulent conveyance or other law for the protection of creditors of any jurisdiction that may otherwise be applicable in connection with the transfer of the assets under this Agreement and in consideration of such waiver, Seller agrees to indemnify Buyer and hold Buyer harmless from and against any Damages arising out of or resulting from such non-compliance. 5.14 Vehicle Leases. Seller shall negotiate a settlement of the vehicle leases for all vehicles used in the Operations at the Locations and Buyer shall then direct its vehicle leasing company to purchase of all such vehicles, at which time Seller shall arrange for its leasing company to provide title to such vehicles as directed by Buyer. Buyer shall pay all transfer taxes relating to such transaction. The parties acknowledge that the leased vehicles transactions will not be consummated prior to Closing, and Seller shall make all leased vehicles available for use by Buyer in conducting operations effective on the Closing Date. In the event that the buyout of the leases owned by LeasePlan, Donlen, Fleet Capital, Verizon, GE Capital, Emigrant and All First (with respect to leased vehicles) are not executed at the time of the Closing, Buyer and Seller agree as follows: (a) Buyer may operate in the ordinary course of business, but shall not remove from the Locations, the vehicles corresponding to those leases until the buyout and purchase by Buyer's leasing company are executed by all relevant parties; and (b) Provided Buyer has diligently pursued good faith efforts to complete the transactions contemplated by this Section, if a buyout for any vehicle is not executed within sixty (60) days of the Closing Date, Seller shall buyout the lease on any such vehicles and Buyer shall reimburse Seller for the buyout amount, after which Seller shall transfer title to said vehicles. Each party shall pay its own transfer taxes in that event. In the event that Seller, after good faith efforts, is unable to transfer title to any vehicle to Buyer pursuant to the terms above, Buyer may purchase a new vehicle of a similar make, model and type in which case Seller shall pay to Buyer the difference between the cost of the replacement vehicle and the buyout value of the existing vehicle. (c) At all times that Seller is a guarantor or otherwise remains potentially liable in any manner with respect to any motor vehicle lease (each, a "Vehicle Lease") set forth on Exhibit 3.1d: (i) Buyer shall faithfully abide by, perform and discharge, at its sole cost and expense, each and every obligation, covenant and agreement under such Vehicle Lease arising after the Closing Date and shall do so prior 23 to the expiration of any applicable grace or cure period. Buyer hereby agrees to indemnify and hold Seller harmless from and against any and all loss, cost, expense (including reasonable attorneys' fees), damage and liability incurred by Seller as a result of claims brought against Seller with respect to the performance of all of the terms, covenants and conditions of such Vehicle Lease to be performed from and after the Closing Date. (ii) Buyer shall not modify, amend or alter the terms or provisions of such Vehicle Lease, and otherwise shall not take any action that could, in either case, reasonably be expected to increase the aggregate liability of Buyer or Seller thereunder. (iii) Buyer shall not (A) sell, encumber, assign, transfer or otherwise dispose of such Vehicle Lease, the motor vehicles in respect thereof (in respect of any such Lease, the "Leased Motor Vehicle") or Buyer's interest therein, whether effected voluntarily or involuntarily, directly or indirectly, by operation of law or otherwise, or (B) consent to or enter into any contract, agreement or arrangement to take any action prohibited by clause (A) above. (iv) Buyer shall faithfully maintain any and all insurance requirements set forth by the Lessor of the Leased Motor Vehicles. (d) If Buyer shall fail to perform any covenant contained in any Vehicle Lease and does not cure said failure within ten days of receipt of written notice of said failure, (i) Seller may (but shall have no obligation to) make advances to perform the same on Buyer's behalf, and all sums so advanced shall be repaid by Buyer immediately upon the demand of Seller, (ii) Buyer shall transfer such Vehicle Lease and surrender possession of the related Leased Motor Vehicle to Seller immediately upon the demand of Seller and (iii) Seller shall be authorized, absent voluntary surrender by Buyer, to assume the obligations of Buyer under the applicable Vehicle Lease and to take possession of the Leased Motor Vehicle subject to such Lease. To secure the prompt and complete performance and observance of the covenants and other obligations of Buyer above, Buyer hereby grants, conveys, pledges, hypothecates and transfers to Seller a security interest in and to all of Buyer's right, title and interest in and to the Vehicle Leases and the Leased Motor Vehicles. 5.15 Tax Disclosures. Notwithstanding any other agreement among the parties or anything else herein to the contrary, each party to this Agreement (and any employee, representative or other agent thereof) may disclose to any and all persons, without limitation of any kind, the U.S. federal income tax treatment and any tax structure of the transactions contemplated by this Agreement and all materials of any kind (including opinions or other tax analyses) that are provided to it relating to such tax treatment and tax structure; provided, that no party (or any employee, representative or other agent thereof) shall disclose pursuant to this section (i) any information that is not relevant to an understanding of the U.S. federal income tax treatment of the transactions contemplated by this Agreement, including the identity of any party to this Agreement (or its employees, representatives or agents) or other information that could lead any person to determine such identity or (ii) any information to the extent such disclosure could result in a violation of any federal or state securities laws; and provided further, that this section shall not apply until the earliest of (a) the date of public announcement of discussions relating to the transactions, (b) the date of public announcement of the transactions, or (c) the date of execution of an agreement, with or without consideration, to enter into the transactions. 24 5.16 Miscellaneous. This Agreement, including the documents and exhibits referred to herein, contains the entire understanding of the parties hereto and supersedes all prior understandings, agreements or undertakings of the parties with respect to the subject matter contained herein, and may be amended only by a written instrument executed by all of the parties hereto. Wherever possible, each provision of this Agreement shall be interpreted in such a manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or declared invalid under applicable law, such provision shall be void and of no effect and the remaining provisions of this Agreement shall remain in full force and effect. This Agreement shall be a contract made under, governed by and construed under, the laws of the state of Delaware, except no doctrine of choice of law shall be used to apply any law other than that of the state of Delaware. This Agreement shall be binding upon, and inure to the benefit of, the parties hereto and their respective successors, assigns and personal representatives; provided, however, that no assignment by any party hereto of any right hereunder shall be made on or prior to the Closing Date, and no assignment, by operation of law or otherwise, shall relieve any party of its obligations hereunder. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original and all of which shall constitute together but one and the same instrument. (SIGNATURES ON NEXT PAGE) 25 IN WITNESS WHEREOF, the parties hereto have caused this Purchase and Noncompetition Agreement to be executed as of the day and year first above written. SELLER: BUYER: SUBURBAN PROPANE, L.P. FERRELLGAS, L.P. By: Ferrellgas, Inc., General Partner By: /s/Michael J. Dunn, Jr. By: /s/Kenneth A. Heinz, Sr. ----------------------- ------------------------ Senior Vice President, Senior Vice President, Corporate Corporate Development Development Fed. ID # 22-3410352 Fed. ID # 43-1698481 SUBURBAN SALES AND SERVICE, INC. By: /s/Michael J. Dunn, Jr ---------------------- Fed. ID # 22-3410352 26 EX-31.1 3 file003.txt 302 CERTIFICATION OF CEO EXHIBIT 31.1 Certification of the President and Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Mark A. Alexander, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Suburban Propane Partners, L.P.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's Board of Supervisors: (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. May 11, 2004 /s/ MARK A. ALEXANDER ------------------------------------- Mark A. Alexander President and Chief Executive Officer EX-31.2 4 file004.txt 302 CERTIFICATION OF CFO EXHIBIT 31.2 Certification of the Vice President and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Robert M. Plante, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Suburban Propane Partners, L.P.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's Board of Supervisors: (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. May 11, 2004 /s/ ROBERT M. PLANTE -------------------- Robert M. Plante Vice President and Chief Financial Officer EX-32.1 5 file005.txt 906 CERTIFICATION OF CEO EXHIBIT 32.1 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 In connection with the Quarterly Report of Suburban Propane Partners, L.P. (the "Partnership") on Form 10-Q for the period ended March 27, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Mark A. Alexander, Chief Executive Officer and President of the Partnership, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership. /s/ Mark A. Alexander --------------------- Mark A. Alexander President and Chief Executive Officer May 11, 2004 A signed original of this written statement required by Section 906 has been provided to the Partnership and will be furnished to the Securities and Exchange Commission or its staff upon request. This certification shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing. EX-32.2 6 file006.txt 906 CERTIFICATION OF CFO EXHIBIT 32.2 Certification of the Vice President and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Quarterly Report of Suburban Propane Partners, L.P. (the "Partnership") on Form 10-Q for the period ended March 27, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Robert M. Plante, Vice President and Chief Financial Officer of the Partnership, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership. /s/ Robert M. Plante -------------------- Robert M. Plante Vice President and Chief Financial Officer May 11, 2004 A signed original of this written statement required by Section 906 has been provided to the Partnership and will be furnished to the Securities and Exchange Commission or its staff upon request. This certification shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing. -----END PRIVACY-ENHANCED MESSAGE-----