-----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, IJZ/bPc/lhLYHSNQYlgbmPq3fIDRc88YOyXQoHzgFKW2OZq7o+AxN8lm56kblohm rYy2Ddu/O/9JFldCmUwWSQ== 0001005210-99-000007.txt : 19990423 0001005210-99-000007.hdr.sgml : 19990423 ACCESSION NUMBER: 0001005210-99-000007 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980926 FILED AS OF DATE: 19990422 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-K/A SEC ACT: SEC FILE NUMBER: 001-14222 FILM NUMBER: 99598916 BUSINESS ADDRESS: STREET 1: ONE SUBURBAN PLAZA STREET 2: 240 ROUTE 10 WEST CITY: WIPPANY STATE: NJ ZIP: 07981 BUSINESS PHONE: 2018875300 MAIL ADDRESS: STREET 1: ONE SUBURBAN PLZ STREET 2: 240 RTE 10 WEST CITY: WHIPPANY STATE: NJ ZIP: 07981 10-K/A 1 SUBURBAN PROPANE, L.P. AMENDED 10K FOR 09/26/98 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K/A AMENDMENT NO. 1 TO FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 26, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 16 OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from ______ to ______ Commission File Number: 1-14222 SUBURBAN PROPANE PARTNERS, L.P. ------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 22-3410353 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 240 ROUTE 10 WEST, WHIPPANY, NJ 07981 - -------------------------------------------------------------------------------- (Address of principal executive office) (Zip Code) (973) 887-5300 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered COMMON UNITS NEW YORK STOCK EXCHANGE - -------------------------------------------------------------------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE - -------------------------------------------------------------------------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for each shorter period that the Registrant was required to file such reports), and (2) had been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K [X ]. The aggregate market value as of April 15, 1999 of the Registrant's Common Units held by non-affiliates of the Registrant, based on the reported closing price of such units on the New York Stock Exchange on such date ($19.38/unit), was approximately $417,140,900. April 15, 1999 there were outstanding 21,562,500 Common Units and 7,163,750 Subordinated Units. Documents Incorporated by Reference: None EXPLANATORY NOTE ---------------- This Form 10-K/A (Amendment No. 1) amends and restates in its entirety the Registrant's Annual Report on Form 10-K for the fiscal year ended September 26, 1998 filed with the Securities and Exchange Commission (the "Commission") on December 23, 1998 (the "Original Form 10-K"). This amendment and restatement is being filed in response to certain comments of the staff of the Commission on the Original Form 10-K that were made in connection with the proposed recapitalization of the Registrant described in the Registrant's definitive Proxy Statement filed with the Commission on April 22, 1999. The Registrant hereby amends Part I, Items 1 and 3; Part II, Items 5, 6, 7 and 7A; Part III, Items 10 and 12; and Part IV, Item 14. SUBURBAN PROPANE PARTNERS, L.P. AND SUBSIDIARIES INDEX TO ANNUAL REPORT ON FORM 10-K PART I Page ITEM 1. BUSINESS...................................................... 1 ITEM 2. PROPERTIES.................................................... 7 ITEM 3. LEGAL PROCEEDINGS............................................. 7 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........... 7 PART II ITEM 5. MARKET FOR THE REGISTRANT'S UNITS AND RELATED UNITHOLDER MATTERS.................................... 8 ITEM 6. SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA.............. 9 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................. 10 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................................... 18 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................... 19 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE........................... 19 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............ 20 ITEM 11. EXECUTIVE COMPENSATION........................................ 22 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................................................ 27 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................ 29 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K........................................... 30 Signatures............................................................... 31 DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, RELATING TO THE PARTNERSHIP'S FUTURE BUSINESS EXPECTATIONS AND PREDICTIONS AND FINANCIAL CONDITION AND RESULTS OF OPERATIONS. THESE FORWARD-LOOKING STATEMENTS INVOLVE CERTAIN RISKS AND UNCERTAINTIES. IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE DISCUSSED IN SUCH FORWARD-LOOKING STATEMENTS ("CAUTIONARY STATEMENTS") INCLUDE, AMONG OTHER THINGS: THE IMPACT OF WEATHER CONDITIONS ON THE DEMAND FOR PROPANE; FLUCTUATIONS IN THE UNIT COST OF PROPANE; THE ABILITY OF THE PARTNERSHIP TO COMPETE WITH OTHER SUPPLIERS OF PROPANE AND OTHER ENERGY SOURCES; THE ABILITY OF THE PARTNERSHIP TO RETAIN CUSTOMERS; THE IMPACT OF ENERGY EFFICIENCY AND TECHNOLOGY ADVANCES ON THE DEMAND FOR PROPANE; THE ABILITY OF MANAGEMENT TO CONTINUE TO CONTROL EXPENSES; THE IMPACT OF REGULATORY DEVELOPMENTS ON THE PARTNERSHIP'S BUSINESS, INCLUDING THE RESOLUTION OF FINAL RULE HM-225 (49 CFR 171.5) PROMULGATED BY THE RESEARCH AND SPECIAL PROGRAMS ADMINISTRATION OF THE U.S. DEPARTMENT OF TRANSPORTATION; THE IMPACT OF LEGAL PROCEEDINGS ON THE PARTNERSHIP'S BUSINESS; AND, IF THE PROPOSED RECAPITALIZATION OF THE PARTNERSHIP DISCUSSED BELOW IS COMPLETED, THE IMPACT OF THE ADDITIONAL DEBT AT THE OPERATING PARTNERSHIP LEVEL AND THE IMPACT OF THE REPLACEMENT OF A THIRD PARTY DISTRIBUTION SUPPORT ARRANGEMENT WITH ALTERNATIVE SUPPORT FROM THE PARTNERSHIP. ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO SUBURBAN OR PERSONS ACTING ON ITS BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY SUCH CAUTIONARY STATEMENTS. PART I ITEM 1. BUSINESS. - ----------------- GENERAL Suburban Propane Partners, L.P. (the "Partnership"), a publicly traded Delaware limited partnership is engaged, through subsidiaries, in the retail and wholesale marketing of propane and related appliances and services. The Partnership believes it is the third largest retail marketer of propane in the United States, serving more than 700,000 active residential, commercial, industrial and agricultural customers from more than 340 customer service centers in over 40 states. The Partnership's operations are concentrated in the east and west coast regions of the United States. The retail propane sales volume of the Partnership was approximately 530 million gallons during the fiscal year ended September 26, 1998. Based on industry statistics, the Partnership believes that its retail propane sales volume constitutes approximately 6% of the domestic retail market for propane. The Partnership conducts its business principally through its subsidiary, Suburban Propane, L.P. (the "Operating Partnership"), a Delaware limited partnership. The Partnership and the Operating Partnership were formed in 1995 to acquire and operate the propane business and assets of Suburban Propane, a division of Quantum Chemical Corporation (the "Predecessor Company"), then owned by Hanson PLC ("Hanson"). The Predecessor Company had been continuously engaged in the retail propane business since 1928 and had been owned by Quantum since 1983. In addition, Suburban Sales and Service, Inc. (the "Service Company"), a subsidiary of the Operating Partnership, was formed to acquire and operate the service work and appliance and propane equipment parts businesses of the Predecessor Company. The Partnership, the Operating Partnership and the Service Company are collectively referred to hereinafter as the "Partnership Entities." The Partnership Entities commenced operations on March 5, 1996 upon consummation of an initial public offering of Common Units representing limited partner interests in the Partnership, the private placement of $425 million aggregate principal amount of Senior Notes and the transfer of all the propane assets (excluding the net accounts receivable balance) of the Predecessor Company to the Operating Partnership and Service Company. Suburban Propane GP, Inc. (the "General Partner") is a wholly-owned subsidiary of Millennium Petrochemicals Inc., ("Millennium Petrochemicals") and serves as the general partner of the Partnership and the Operating Partnership. Both the General Partner and Millennium Petrochemicals are indirect wholly-owned subsidiaries of Millennium Chemicals Inc. ("Millennium") which was formed as a result of Hanson's demerger in October 1996. Millennium Petrochemicals was formerly named Quantum Chemical Corporation ("Quantum"). The General Partner holds a 1% general partner interest in the Partnership and a 1.0101% general partner interest in the Operating Partnership. In addition, the General Partner owns a 24.4% limited partner interest and a special limited partner interest in the Partnership. The limited partner interest is evidenced by 7,163,750 Subordinated Units and the special limited partner interest is evidenced by 220,000 Additional Partnership Units ("APUs"). The General Partner has delegated to the Partnership's Board of Supervisors all management powers over the business and affairs of the Partnership Entities that the General Partner possesses under applicable law. THE RECAPITALIZATION On November 30, 1998, the Partnership announced a proposed recapitalization of the Partnership (the "Recapitalization"), pursuant to which, the Partnership will, among other things, redeem all 7,163,750 outstanding Subordinated Units and all 220,000 outstanding APUs, all of which are owned by the General Partner, for a total price of $69 million, subject to adjustment. In connection with the Recapitalization, the Partnership's Distribution Support Agreement with the General Partner will be terminated and replaced with a $21.6 million liquidity arrangement of committed availability under the working capital line of the Operating Partnership's Amended and Restated Credit Agreement, dated as of September 30, 1997 (the "Bank Credit Facilities"), or any replacement facility through the quarter ending December 31, 2000, and $11.6 million of such committed availability through March 31, 2001. The redemption price will be funded from the Operating Partnership's then existing cash resources and, if necessary, borrowings under the Bank Credit Facilities. See "Liquidity and Capital Resources" in Item 7 of this Annual Report for a discussion of the Operating Partnership's new credit facility. In addition, the General Partner will sell its entire general partner interests in the Partnership and the Operating Partnership, including its incentive distribution rights in the Partnership ("IDRs"), to Suburban Energy Services Group LLC, a new entity owned by senior management of the Partnership (the "Successor General Partner"), for a total price of $6 million and the Successor General Partner will assume the rights and duties of the General Partner under the partnership agreements of the Partnership and the Operating Partnership and will be substituted as the new general partner of the Partnership and the Operating Partnership. In connection with the Recapitalization and the substitution of the General Partner, the IDRs will be amended to eliminate the second and third target incentive distribution rights of the new General Partner with respect to distributions in excess of the Minimum Quarterly Distribution to the holders ("Common Unitholders") of common units ("Common Units") and the new General Partner, thereby increasing the rights of Common Unitholders to distributions of available cash in excess of the Minimum Quarterly Distribution and the Board of Supervisors will have the right to convert the IDRs to Common Units after the fifth anniversary of the closing of the Recapitalization. The Partnership Agreement and the Operating Partnership Agreement will be amended to permit and effect the Recapitalization and the substitution of the general partner. The Recapitalization and the substitution of the general partner were approved by the Partnership's Board of Supervisors upon the recommendation of its elected supervisors acting as a Special Committee. Consummation of the Recapitalization is subject to certain conditions, including the approval of the Partnership's public Common Unitholders and senior noteholders. A Special Meeting of Common Unitholders will be scheduled to vote on the Recapitalization in 1999. It cannot be predicted with certainty when the Recapitalization will be complete, but the Partnership hopes to complete it in the third quarter of the 1999 fiscal year. For additional information regarding the Recapitalization, please see the Partnership's definitive Proxy Statement, filed with the Securities and Exchange Commission on April 22, 1999. BUSINESS STRATEGY The Partnership's strategy is to expand its operations and increase its retail market share in selected markets both through the acquisition of other propane distributors and through internal growth. Although acquisitions have contributed to its growth, the Partnership believes that the current market prices for propane distributors are greater than the cost to grow internally through improved customer retention and marketing. As a result, the Partnership has focused on internal growth. Acquisitions during fiscal 1998 included 5 propane distributors for total consideration of $4.0 million compared to 5 propane distributors acquired in fiscal 1997 for total consideration of $1.7 million and 17 propane distributors acquired during fiscal 1996 for total consideration of $31.7 million. The Partnership plans to continue to pursue internal growth by acquiring new customers, retaining existing customers and by selling additional products and services to its customers. The Partnership employs a nationwide sales organization and has a comprehensive customer retention program. By retaining more of its existing customers and continuing to seek new customers, the Partnership believes it can increase its customer base and improve its profitability. The Partnership evaluates possible acquisition candidates which are generally local propane distributors as to the potential return on investment after considering synergies which may result from incorporating such acquisitions into the Partnership's infrastructure. The Partnership has and will continue to evaluate non-propane related acquisitions which management believes would provide an attractive return on investment. INDUSTRY BACKGROUND AND COMPETITION Propane, a by-product of natural gas processing and petroleum refining, is a clean-burning energy source recognized for its transportability and ease of use relative to alternative forms of stand-alone energy sources. Retail propane use falls into three broad categories: (i) residential and commercial applications, (ii) industrial applications and (iii) agricultural uses. In the residential and commercial markets, propane is used primarily for space heating, water heating, clothes drying and cooking. Industrial customers primarily use propane as a motor fuel burned in internal combustion engines that power over-the-road vehicles, forklifts and stationary engines, to fire furnaces, as a cutting gas and in other process applications. In the agricultural market, propane is primarily used for tobacco curing, crop drying, poultry brooding and weed control. In its wholesale operations, the Partnership sells propane principally to large industrial end-users and other propane distributors. Propane is extracted from natural gas or oil wellhead gas at processing plants or separated from crude oil during the refining process. Propane is normally transported and stored in a liquid state under moderate pressure or refrigeration for ease of handling in shipping and distribution. When the pressure is released or the temperature is increased, it is usable as a flammable gas. Propane is colorless and odorless; an odorant is added to allow its detection. Propane is clean burning, producing negligible amounts of pollutants when consumed. Based upon information provided by the Energy Information Agency, propane accounts for approximately three to four percent of household energy consumption in the United States. Propane competes primarily with electricity, natural gas and fuel oil as an energy source, principally on the basis of price, availability and portability. Propane is more expensive than natural gas on an equivalent BTU basis in locations served by natural gas, but serves as an alternative to natural gas in rural and suburban areas where natural gas is unavailable or portability of product is required. Historically, the expansion of natural gas into traditional propane markets has been inhibited by the capital costs required to expand pipeline and retail distribution systems. Although the extension of natural gas pipelines tends to displace propane distribution in areas affected, the Partnership believes that new opportunities for propane sales arise as more geographically remote neighborhoods are developed. Propane is generally less expensive to use than electricity for space heating, water heating, clothes drying and cooking. Due to the current geographical diversity of the Partnership's operations, fuel oil has not been a significant competitor. In addition, propane and fuel oil compete to a lesser extent as a result of the cost of converting from one to the other. In addition to competing with alternative energy sources, the Partnership competes with other companies engaged in the retail propane distribution business. Competition in the propane industry is highly fragmented and generally occurs on a local basis with other large full-service multi-state propane marketers, thousands of smaller local independent marketers and farm cooperatives. Based on industry publications, the Partnership believes that the 10 largest retailers, including the Partnership, account for approximately 33% of the total retail sales of propane in the United States, and that no single marketer has a greater than 10% share of the total retail market in the United States. Based on industry statistics, the Partnership believes that its retail sales volume constitutes approximately 6% of the domestic retail market for propane. Most of the Partnership's retail distribution branches compete with five or more marketers or distributors. Each retail distribution outlet operates in its own competitive environment because retail marketers tend to locate in close proximity to customers in order to lower the cost of providing service. The typical retail distribution outlet generally has an effective marketing radius of approximately 50 miles although in certain rural areas the marketing radius may be extended by a satellite office. PRODUCTS, SERVICES AND MARKETING The Partnership distributes propane through a nationwide retail distribution network consisting of more than 340 customer service centers in over 40 states. The Partnership's operations are concentrated in the east and west coast regions of the United States. In fiscal 1998, the Partnership served more than 700,000 active customers. Approximately two-thirds of the Partnership's retail propane volume has historically been sold during the six-month peak heating season from October through March, as many customers use propane for heating purposes. Typically, customer service centers are found in suburban and rural areas where natural gas is not readily available. Generally, such locations consist of an office, appliance showroom, warehouse and service facilities, with one or more 18,000 to 30,000 gallon storage tanks on the premises. Most of the Partnership's residential customers receive their propane supply pursuant to an automatic delivery system which eliminates the customer's need to make an affirmative purchase decision. From its customer service centers, the Partnership also sells, installs and services equipment related to its propane distribution business, including heating and cooking appliances and, at some locations, propane fuel systems for motor vehicles. The Partnership sells propane primarily to six markets: residential, commercial, industrial (including engine fuel), agricultural, other retail users and wholesale. Approximately 71.0% of the gallons sold by the Partnership in fiscal 1998 were to retail customers (26.8% to residential customers, 17.8% to commercial customers, 10.4% to industrial customers (including 8.2% to engine fuel customers), 4.7% to agricultural customers and 11.3% to other retail users) and approximately 29.0% were for hedging activities and wholesale customers. Sales to residential customers in fiscal 1998 accounted for approximately 54% of the Partnership's gross profit on propane sales, reflecting the higher-margin nature of this segment of the market. No single customer accounted for 10% or more of the Partnership's revenues during fiscal year 1998. Retail deliveries of propane are usually made to customers by means of bobtail and rack trucks. Propane is pumped from the bobtail truck, which generally holds 2,200 gallons of propane, into a stationary storage tank on the customer's premises. The capacity of these tanks ranges from approximately 100 gallons to approximately 1,200 gallons, with a typical tank having a capacity of 300 to 400 gallons. The Partnership also delivers propane to retail customers in portable cylinders, which typically have a capacity of 5 to 35 gallons. When these cylinders are delivered to customers, empty cylinders are picked up for replenishment at the Partnership's distribution locations or are refilled in place. The Partnership also delivers propane to certain other bulk end users of propane in larger trucks known as transports (which have an average capacity of approximately 9,000 gallons). End-users receiving transport deliveries include industrial customers, large-scale heating accounts, such as local gas utilities which use propane as a supplemental fuel to meet peak load deliverability requirements, and large agricultural accounts which use propane for crop drying. Propane is generally transported from refineries, pipeline terminals, storage facilities (including the Partnership's storage facilities in Hattiesburg, Mississippi and Elk Grove, California), and coastal terminals to the Partnership's customer service centers by a combination of common carriers, owner-operators and railroad tank cars. (See Item 2.) In its wholesale operations, the Partnership principally sells propane to large industrial end-users and other propane distributors. This market segment includes customers who use propane to fire furnaces, as a cutting gas and in other process applications. Due to the low margin nature of the wholesale market as compared to the retail market, the Partnership has reduced its emphasis on wholesale marketing, and as such wholesale gallons during fiscal 1998 have decreased. PROPANE SUPPLY The Partnership's propane supply is purchased from over 90 oil companies and natural gas processors at more than 190 supply points located in the United States and Canada. The Partnership also makes purchases on the spot market. The Partnership purchased over 96% of its propane supplies from domestic suppliers during fiscal 1998. Most of the propane purchased by the Partnership in fiscal 1998 was purchased pursuant to one year agreements subject to annual renewal, but the percentage of contract purchases may vary from year to year as determined by the Partnership. Supply contracts generally provide for pricing in accordance with posted prices at the time of delivery or the current prices established at major storage points, and some contracts include a pricing formula that typically is based on such market prices. Some of these agreements provide maximum and minimum seasonal purchase guidelines. The Partnership uses a number of interstate pipelines, as well as railroad tank cars and delivery trucks to transport propane from suppliers to storage and distribution facilities. Supplies of propane from the Partnership's sources historically have been readily available. In the fiscal year ended September 26, 1998, Exxon Corporation ("Exxon") and Shell Oil Company ("Shell") provided approximately 14% and 13%, respectively, of the Partnership's total domestic propane supply. The Partnership believes that, if supplies from either Exxon or Shell were interrupted, it would be able to secure adequate propane supplies from other sources without a material disruption of its operations. Aside from Exxon or Shell, no single supplier provided more than 10% of the Partnership's total domestic propane supply in the fiscal year ended September 26, 1998. See Item 7 for a discussion of the Partnership's evaluation of its suppliers' readiness for Year 2000 compliance in the information services area. The Partnership's product procurement and price risk management group seeks to reduce the effect of price volatility on the Partnership's product costs and to help insure the availability of propane during periods of short supply. The Partnership is currently a party to propane futures transactions on the New York Mercantile Exchange and to forward contracts with various third parties to purchase and sell product at fixed prices in the future. These activities are monitored by management through enforcement of the Partnership's Commodity Trading Policy. See Item 7A of this Report. The Partnership operates large storage facilities in Mississippi and California and smaller storage facilities in other locations and has rights to use storage facilities in additional locations. The Partnership's storage facilities allow the Partnership to buy and store large quantities of propane during periods of low demand, which generally occur during the summer months. The Partnership believes its storage facilities help ensure a more secure supply of propane during periods of intense demand or price instability. TRADEMARKS AND TRADENAMES The Partnership utilizes a variety of trademarks and tradenames which it owns, including "Suburban Propane(R)". The Partnership regards its trademarks, tradenames and other proprietary rights as valuable assets and believes that they have significant value in the marketing of its products. GOVERNMENT REGULATION The Partnership is subject to various federal, state and local environmental, health and safety laws and regulations. Generally, these laws impose limitations on the discharge of pollutants and establish standards for the handling of solid and hazardous wastes. These laws include the Resource Conservation and Recovery Act, the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), the Clean Air Act, the Occupational Safety and Health Act, the Emergency Planning and Community Right to Know Act, the Clean Water Act and comparable state statutes. CERCLA, also known as the "Superfund" law, imposes joint and several liability without regard to fault or the legality of the original conduct on certain classes of persons that are considered to have contributed to the release or threatened release of a "hazardous substance" into the environment. Propane is not a hazardous substance within the meaning of CERCLA, however, the Partnership owns real property where such hazardous substances may exist. Pursuant to the 1990 amendments to the Clean Air Act, risk management plans must be implemented at the Partnership's customer service centers by June 22, 1999. The Partnership anticipates that all of its customer service centers will be in compliance with the risk management plan requirement by or before the aforementioned deadline. National Fire Protection Association Pamphlets No. 54 and No. 58, which establish rules and procedures governing the safe handling of propane, or comparable regulations, have been adopted as the industry standard in all of the states in which the Partnership operates. In some states these laws are administered by state agencies, and in others they are administered on a municipal level. With respect to the transportation of propane by truck, the Partnership is subject to regulations promulgated under the Federal Motor Carrier Safety Act. These regulations cover the transportation of hazardous materials and are administered by the United States Department of Transportation. The Partnership conducts ongoing training programs to help ensure that its operations are in compliance with applicable safety regulations. The Partnership maintains various permits that are necessary to operate some of its facilities, some of which may be material to its operations. The Partnership believes that the procedures currently in effect at all of its facilities for the handling, storage and distribution of propane are consistent with industry standards and are in compliance in all material respects with applicable laws and regulations. The Research and Special Programs Administration ("RSPA") of the U.S. Department of Transportation has recently promulgated Final Rule HM-225 (49 CFR 171.5) which adopts temporary operating requirements for cargo tank motor vehicles used to transport propane (the "Final Rule"). The Final Rule, which became effective on August 16, 1997, effectively requires that such vehicles be equipped with remote control equipment capable of shutting off the flow of propane in the event of a break in the vehicle's delivery hose or piping. The Final Rule also contains a statement that a pre-existing RSPA regulation (Hazardous Materials Regulation 177.834(i)) requires operators of cargo tank vehicles to maintain an "unobstructed view" of the vehicle itself when making deliveries to customer tanks. This new interpretation espoused by RSPA regarding the unobstructed view requirement would require either two operators being in attendance during most customer deliveries or one attendant remaining at a mid-point between the cargo tank vehicle and the customer tank, a practice that the Partnership and the propane industry consider to be unsafe. The Partnership and four other major propane marketers have filed suit in the U.S. District Court for the Western District of Missouri challenging the RSPA Final Rule on the basis that it was promulgated in an arbitrary and capricious manner and in violation of the Administrative Procedure Act. In March 1998, the plaintiffs obtained a preliminary injunction staying and postponing the effective date of the Final Rule as it applies to bobtail trucks and any enforcement of RSPA's interpretation of Hazardous Materials Regulation 177.834(i). The National Propane Gas Association, the industry's trade association, has also filed a suit challenging the Final Rule in the U.S. District Court for the Northern District of Texas. In July 1998, RSPA announced the establishment of an advisory committee for a negotiated rule making regarding the matters addressed in the Final Rule. The Partnership cannot yet predict the outcome of the aforementioned suits and negotiated rulemaking proceeding. Future developments, such as stricter environmental, health or safety laws and regulations thereunder, could affect Partnership operations. It is not anticipated that the Partnership's compliance with or liabilities under environmental, health and safety laws and regulations, including CERCLA, will have a material adverse effect on the Partnership. To the extent that there are any environmental liabilities unknown to the Partnership or environmental, health or safety laws or regulations are made more stringent, there can be no assurance that the Partnership's results of operations will not be materially and adversely affected. EMPLOYEES As of September 26, 1998 the Partnership had 3,217 full time employees, of whom 319 were general and administrative (including fleet maintenance personnel), 25 were transportation and product supply and 2,873 were customer service center employees. Approximately 181 of such employees are represented by 9 different local chapters of labor unions. The Partnership believes that its relations with both its union and non-union employees are satisfactory. From time to time, the Partnership hires temporary workers to meet peak seasonal demands. ITEM 2. PROPERTIES. - ------------------- The Partnership currently owns approximately 70% of its customer service center and satellite locations that it operates and leases the balance of its retail locations from third parties. In addition, the Partnership owns and operates a 187 million gallon underground storage facility in Hattiesburg, Mississippi, and a 22 million gallon refrigerated, above-ground storage facility in Elk Grove, California. The transportation of propane requires specialized equipment. The trucks and railroad tank cars utilized for this purpose carry specialized steel tanks that maintain the propane in a liquefied state. As of September 26, 1998, the Partnership had a fleet of approximately 5 transport truck tractors, of which 4 are owned by the Partnership, and 617 railroad tank cars, of which approximately 2% are owned by the Partnership. In addition, the Partnership utilizes approximately 1,700 bobtail and rack trucks, of which approximately 73% are owned by the Partnership and approximately 1,675 other delivery and service vehicles, of which approximately 58% are owned by the Partnership. Vehicles that are not owned by the Partnership are leased. As of September 26, 1998, the Partnership owned approximately 944,000 customer storage tanks with typical capacities of 100 to 500 gallons and approximately 93,000 portable cylinders with typical capacities of 5 to 10 gallons. The Partnership believes that it has satisfactory title to or valid rights to use all of its material properties and, although some of such properties are subject to liabilities and leases and, in certain cases, liens for taxes not yet due and payable and immaterial encumbrances, easements and restrictions, the Partnership does not believe that any such burdens will materially interfere with the continued use of such properties by the Partnership in its business, taken as a whole. ITEM 3. LEGAL PROCEEDINGS. - -------------------------- LITIGATION A number of personal injury, property damage and product liability suits are pending or threatened against the Partnership. In general, these lawsuits have arisen in the ordinary course of the Partnership's business and involve claims for actual damages, and in some cases, punitive damages. The Partnership is self-insured for general and product, workers' compensation and automobile liabilities up to predetermined amounts above which third party insurance applies. These self-insurance reserves include provisions for losses related to pending or threatened litigation. Although any litigation is inherently uncertain, based on past experience, the information currently available to it and the amount of its self-insurance reserves for known and unasserted self-insurance claims (which was approximately $21.4 million at September 26, 1998), the Partnership does not believe that these pending or threatened litigation matters will have a material adverse effect on its results of operations or its financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. - ------------------------------------------------------------ There were no matters submitted to a vote of security holders of the Partnership, through the solicitation of proxies or otherwise, during the fourth fiscal quarter of the year ended September 26, 1998. PART II ITEM 5. MARKET FOR THE REGISTRANT'S UNITS AND RELATED UNITHOLDER MATTERS. - ---------------------------------------------------------------- The Common Units, representing limited partner interests in the Partnership, are listed and traded on the New York Stock Exchange under the symbol SPH. As of December 3, 1998, there were 1,047 registered Common Unitholders of record. The following table sets forth, for the periods indicated, the high and low sale prices per Common Unit, as reported on the New York Stock Exchange, and the amount of cash distributions paid per Common Unit. Common Unit Cash Distribution Paid Price Range ---------------------- High Low ---- --- 1997 FISCAL YEAR - ---------------- First Quarter $21.88 $18.75 $0.50 Second Quarter 20.63 17.75 0.50 Third Quarter 18.75 17.00 0.50 Fourth Quarter 20.19 18.06 0.50 1998 FISCAL YEAR - ---------------- First Quarter $20.56 $15.38 $0.50 Second Quarter 20.00 17.50 0.50 Third Quarter 19.50 18.00 0.50 Fourth Quarter 20.00 17.56 0.50 1999 FISCAL YEAR - ---------------- First Quarter $19.68 $17.44 $0.50 Second Quarter 20.13 18.00 0.50 Third Quarter (through April 12, 1999) 19.50 17.94 - There is no established public trading market for the Partnership's Subordinated Units, representing limited partner interests, all of which are held by the General Partner. The Partnership makes quarterly distributions to its partners in an aggregate amount equal to its Available Cash (as defined) for such quarter. Available Cash generally means all cash on hand at the end of the fiscal quarter plus all additional cash on hand as a result of borrowings and purchases of APUs subsequent to the end of such quarter less cash reserves established by the Board of Supervisors in its reasonable discretion for future cash requirements. The Partnership is a publicly traded limited partnership that is not subject to federal income tax. Instead, Unitholders are required to report their allocable share of the Partnership's earnings or loss, regardless of whether the Partnership makes distributions. ITEM 6. SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA. - --------------------------------------------------------- The following table presents selected condensed consolidated historical financial data of the Partnership and the Predecessor Company. The selected condensed consolidated historical data is derived from the audited financial statements of the Partnership and Predecessor Company. The dollar amounts in the table below, except per Unit data, are in thousands.
PARTNERSHIP (A) PREDECESSOR COMPANY ------------------------------------- ------------------------------------ MARCH 5, OCTOBER 1, YEAR ENDED 1996 1995 YEAR ENDED ---------------------- THROUGH THROUGH --------------------- SEPT 26, SEPT 27, SEPT 28, MARCH 4, SEPT 30, OCTOBER 1, 1998 1997 1996 1996 1995 1994 ---- ---- ---- ---- ---- ---- STATEMENT OF OPERATIONS DATA Revenues.......................... $ 667,287 $ 771,131 $ 323,947 $ 383,999 $ 633,620 $ 677,767 Depreciation and Amortization...................... 36,531 37,307 21,046 14,816 34,055 34,300 Restructuring Charge - 6,911 2,340 - - - Income (Loss) Before Interest Expense and Income Taxes........ 68,814 47,763 (3,464) 61,796 55,544 75,490 Interest Expense, Net............................... 30,614 33,979 17,171 - - - Provision for Income Taxes ..................... 35 190 147 28,147 25,299 33,644 Net Income (Loss)................. 38,165 13,594 (20,782) 33,649 30,245 41,846 Net Income (Loss) per Unit (b)...................... $ 1.30 $ 0.46 $ (0.71) BALANCE SHEET DATA (END OF PERIOD) Current Assets.................... $ 132,781 $ 104,361 $ 120,692 $ 78,846 $ 88,566 Total Assets...................... 729,565 745,634 776,651 705,686 724,280 Current Liabilities 91,550 96,701 101,826 69,872 74,555 Long-term Debt.................... 427,897 427,970 428,229 - - Other Long-term Liabilities....................... 62,318 79,724 81,917 77,579 90,173 Predecessor Equity................ 558,235 559,552 Partners' Capital - General Partner................... 24,488 12,830 3,286 Partners' Capital - Limited Partners.................. 123,312 128,409 161,393 STATEMENT OF CASH FLOWS DATA Cash Provided by (Used in) Operating Activities............ $ 70,073 $ 58,848 $ 62,961 $ (3,765) $ 53,717 $ 77,067 Investing Activities............ $ 2,900 $ (20,709) $ (30,449) $ (21,965) $ (22,317) $ (16,126) Financing Activities............ $ (32,490) $ (37,734) $ (13,786) $ 25,799 $ (31,562) $ (68,093) OTHER DATA EBITDA (c)........................ $ 105,345 $ 85,070 $ 17,582 $ 76,612 $ 89,599 $ 109,790 Capital Expenditures (d) Maintenance and growth............ $ 12,617 $ 24,888 $ 16,089 $ 9,796 $ 21,359 $ 17,839 Acquisitions...................... $ 4,041 $ 1,880 $ 15,357 $ 13,172 $ 5,817 $ 1,448 Retail Propane Gallons Sold...................... 529,796 540,799 257,029 309,871 527,269 568,809
NOTES: (a) The Partnership acquired the propane business and assets of the Predecessor Company on March 5, 1996 (the Closing Date). There are no material differences in the basis of assets and liabilities between the Partnership and the Predecessor Company. (b) Net income (loss) per Unit is computed by dividing the limited partners' interest in net income (loss) by the number of Units outstanding. (c) EBITDA (earnings before interest, taxes, depreciation and amortization) is defined as income (loss) before interest expense and income taxes plus depreciation and amortization. EBITDA should not be considered as an alternative to net income (as an indicator of operating performance) or as an alternative to cash flow (as a measure of liquidity or ability to service debt obligations) and is not in accordance with or superior to generally accepted accounting principles, but provides additional information for evaluating the Partnership's ability to pay the Minimum Quarterly Distribution. (d) The Partnership's capital expenditures fall generally into three categories: (i) maintenance expenditures, which include expenditures for repair and replacement of property, plant and equipment, (ii) growth capital expenditures which include new propane tanks and other equipment to facilitate expansion of the Partnership's customer base and operating capacity; and (iii) acquisition capital expenditures, which include expenditures related to the acquisition of retail propane operations and a portion of the purchase price allocated to intangibles associated with such acquired businesses. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - --------------------------------------------------------- The following is a discussion of the historical financial condition and results of operations of the Partnership and the Predecessor Company. The discussion should be read in conjunction with the historical consolidated financial statements and notes thereto included elsewhere in this Form 10-K. Since the Operating Partnership and Service Company account for substantially all of the assets, revenues and earnings of the Partnership, a separate discussion of the Partnership's results of operations from other sources is not presented. GENERAL The Partnership is engaged in the retail, wholesale marketing and trading of propane and related sales of appliances and services. The Partnership believes it is the third largest retail marketer of propane in the United States, serving more than 700,000 active residential, commercial, industrial and agricultural customers from more than 340 customer service centers in over 40 states. The Partnership's annual retail propane sales volumes were approximately 530 million, 541 million and 567 million gallons during the fiscal years ended September 26, 1998, September 27, 1997 and September 28, 1996, respectively. The retail propane business of the Partnership consists principally of transporting propane purchased on the contract and spot markets, primarily from major oil companies, to its retail distribution outlets and then to storage tanks located on the customers' premises. In the residential and commercial markets, propane is primarily used for space heating, water heating, clothes drying and cooking purposes. Industrial customers primarily use propane as a motor fuel burned in internal combustion engines that power over-the-road vehicles, forklifts and stationary engines, to fire furnaces, as a cutting gas and in other process applications. In the agricultural market, propane is primarily used for tobacco curing, crop drying, poultry brooding and weed control. In its wholesale operations, the Partnership sells propane principally to large industrial end-users and other propane distributors. PRODUCT COSTS The retail propane business is a "margin-based" business where the level of profitability is largely dependent on the difference between retail sales prices and product cost. The unit cost of propane is subject to volatile changes as a result of product supply or other market conditions. Propane unit cost changes can occur rapidly over a short period of time and can impact retail margins. There is no assurance that the Partnership will be able to pass on product cost increases fully, particularly when product costs increase rapidly. SEASONALITY The retail propane distribution business is seasonal because of propane's primary use for heating in residential and commercial buildings. Historically, approximately two-thirds of the Partnership's retail propane volume is sold during the six-month peak heating season of October through March. Consequently, sales and operating profits are concentrated in the Partnership's first and second fiscal quarters. Cash flows from operations, therefore, are greatest during the second and third fiscal quarters when customers pay for propane purchased during the winter heating season. To the extent necessary, the Partnership will reserve cash from the second and third quarters for distribution to Unitholders in the first and fourth fiscal quarters. WEATHER Weather conditions have a significant impact on the demand for propane for both heating and agricultural purposes. Many customers of the Partnership rely heavily on propane as a heating fuel. Accordingly, the volume of propane sold is directly affected by the severity of the winter weather which can vary substantially from year to year. SELECTED QUARTERLY FINANCIAL DATA Due to the seasonality of the retail propane business, first and second quarter revenues, gross profit and earnings are consistently greater than the comparable third and fourth quarter results. The following presents the Partnership's selected quarterly financial data for the two years ended September 26, 1998. Fiscal year ended September 26, 1998 (unaudited) (in thousands, except per Unit amounts)
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER FISCAL 1998 ------------- -------------- ------------- -------------- ----------- Revenues $ 204,886 $ 230,429 $ 125,109 $ 106,863 $ 667,287 Income (Loss) Before Interest Expense and Income Taxes 35,025 44,757 (2,925) (8,043) 68,814 Net Income (Loss) 26,901 37,011 (10,235) (15,512) 38,165 Net Income (Loss) per Unit .92 1.26 (.35) (.53) 1.30 EBITDA ...................... 44,317 53,930 6,154 944 105,345 Retail Gallons Sold ......... 158,278 180,139 100,735 90,644 529,796
Fiscal year ended September 27, 1997 (unaudited) (in thousands, except per Unit amounts)
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER FISCAL 1997 ------------- -------------- ------------- -------------- ----------- Revenues $246,028 $277,631 $132,363 $115,109 $771,131 Income (Loss) Before Interest Expense and Income Taxes 25,900 39,459 (10,953) (6,643) 47,763 Net Income (Loss) 17,338 30,281 (19,181) (14,844) 13,594 Net Income (Loss) per Unit .59 1.03 (.65) (.51) .46 EBITDA 35,181 48,647 (1,611) 2,853 85,070 Retail Gallons Sold 158,996 183,307 102,899 95,597 540,799
EBITDA (earnings before interest, taxes, depreciation and amortization) is calculated as income (loss) before interest expense and income taxes plus depreciation and amortization. EBITDA should not be considered as an alternative to net income (as an indicator of operating performance) or as an alternative to cash flow (as a measure of liquidity or ability to service debt obligations) and is not in accordance with or superior to generally accepted accounting principles, but provides additional information for evaluating the Partnership's ability to pay the Minimum Quarterly Distribution. Because EBITDA excludes some, but not all, items that affect net income and this measure may vary among companies, the EBITDA data presented above may not be comparable to similarly titled measures of other companies. RESULTS OF OPERATIONS FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997 - --------------------------------------------- REVENUES. Revenues decreased $103.8 million or 13.5% to $667.3 million in fiscal 1998 compared to $771.1 million in fiscal 1997. Revenues from retail activities decreased $77.1 million or 12.8% to $523.4 million in fiscal 1998 compared to $600.5 million in fiscal 1997. This decrease is primarily attributable to lower product costs which resulted in lower selling prices and, to a lesser extent, a decrease in retail gallons sold. Overall, higher nationwide inventories of propane, coupled with warmer than normal temperatures during the winter of fiscal 1998, resulted in a significant decrease in the cost of propane when compared to the winter of fiscal 1997. Temperatures during fiscal 1998 were 4% warmer than normal and 4% warmer than fiscal 1997, as reported by National Oceanic and Atmospheric Administration ("NOAA"), which is attributable to the El Nino weather phenomenon. Temperatures during January and February of the fiscal 1998 heating season were the warmest on record according to the NOAA which began keeping records over 100 years ago. Retail gallons sold decreased 2.0% or 11.0 million gallons to 529.8 million gallons in fiscal 1998 compared to 540.8 million gallons in the prior year. The decline in retail gallons sold is principally attributable to warmer temperatures, principally during the winter heating season, in all areas of the Partnership's operations. Revenues from wholesale and hedging activities decreased $25.1 million or 25.0% to $75.2 million in fiscal 1998 compared to $100.2 million in fiscal 1997. This decrease is attributed to the Partnership's reduced emphasis on wholesale marketing, due to the low margin nature of the wholesale market. The decrease in wholesale revenues was partially offset by the increase in the Partnership's product procurement and price risk management activities which began in the fourth quarter of fiscal 1997. Revenues from hedging activities increased $5.6 million to $13.8 million in 1998 compared to $8.2 million in fiscal 1997. The gallons sold for hedging purposes in fiscal 1998 and 1997 were 40.8 million and 17.0 million, respectively. OPERATING EXPENSES. Operating expenses decreased $6.9 million or 3.3% to $202.9 million in fiscal year 1998 compared to $209.8 million in the prior year. The decrease is primarily attributable to the continued favorable impact of restructuring activities undertaken during 1997, principally lower payroll and benefit costs. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased $5.0 million or 15.3% to $37.6 million in fiscal 1998 compared to $32.6 million in the prior year. The increase is primarily attributable to a $1.4 million write-off of certain impaired information systems assets, an increase in professional consulting services, primarily in the information systems area, and a $2.0 million charge related to insurance claims for which insurance coverage was denied. The $1.4 million write-off of impaired assets principally represents software and implementation costs incurred under a project to replace the Partnership's retail/sales system. The project was aborted when the Partnership's management determined that the software did not have the functionality and flexibility originally represented by the software vendor. As such, the Partnership never installed the new software and is continuing to use its existing retail/sales system. The Partnership is currently evaluating alternatives to replace the retail/sales system. The insurance claim resulted from the collapse of the Partnership's underground propane storage cavern and associated fire that occurred in Hainesville, Texas in November 1995. Third parties who owned interests in nearby oil and gas wells sued the Partnership, Millennium, and other parties and claimed damage to the wells resulting from the collapse of the underground cavern and alleged brine water migration. The Partnership's insurance carrier denied coverage based upon the pollution exclusion endorsement of its policy. The Partnership settled this claim in December 1998 for $1.55 million, $300,000 of which was paid by Millennium. The Partnership is currently addressing with its insurance carrier the issue of responsibility for outstanding legal and expert expenses. INCOME BEFORE INTEREST EXPENSE AND INCOME TAXES AND EBITDA. Results for the fiscal year 1998 include a $5.1 million gain from the sale of an investment in the Dixie Pipeline Co. and a $1.8 million write-off of certain impaired assets. Results for the prior year period include a restructuring charge of $6.9 million. Excluding these one-time items from both periods, income before interest and income taxes increased 19.7% or $10.8 million to $65.5 million compared to $54.7 million in the prior period. EBITDA, excluding the one-time items from both periods, increased 10.9% or $10.0 million to $102.0 million compared to $92.0 million in the prior period. The improvement in income before interest expense and income taxes and EBITDA is primarily attributable to higher overall gross profit and lower operating expenses partially offset by higher selling, general and administrative expenses. The increase in gross profit principally resulted from overall higher average propane unit margins and the expansion of the Partnership's product procurement and price risk management activities, including hedging transactions, partially offset by reduced volume of retail propane gallons sold. The overall higher average propane unit margins were attributable to lower product costs, resulting from a less volatile propane market during 1998 and more favorable purchasing contracts which were not fully reflected in lower retail selling prices. EBITDA should not be considered as an alternative to net income (as an indicator of operating performance) or as an alternative to cash flow (as a measure of liquidity on ability to service debt obligations) but provides additional information for evaluating the Partnership's ability to distribute the Minimum Quarterly Distribution. INTEREST EXPENSE. Net interest expense decreased $3.4 million to $30.6 million in fiscal 1998 compared with $34.0 million in the prior year. The decrease is attributable to higher interest income on significantly increased cash investments in fiscal 1998 resulting from higher net income, proceeds from the sale of the Partnership's investment in the Dixie Pipeline Co. and, to a lesser extent, improved working capital management and lower product costs. FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996 - --------------------------------------------- The Partnership acquired the propane business and assets of the Predecessor Company on March 5, 1996. The following discussion of revenues compares the results of the Partnership for the year ended September 27, 1997 with the pro forma results of the Predecessor Company for the year ended September 26, 1996 and the discussion of operating expenses, selling, general and administrative expenses and interest expense compares the results of the Partnership for the year ended September 27, 1997 with the seven months ended September 26, 1996. REVENUES. Revenues increased $63.2 million or 8.9% to $771.1 million in fiscal 1997 compared to $707.9 million in fiscal 1996. The increase is primarily attributable to higher average retail and wholesale selling prices resulting from higher propane product costs. Retail gallons sold decreased 4.6% or 26.1 million gallons to 540.8 million gallons in fiscal 1997 compared to 566.9 million gallons in the prior year, while wholesale gallons sold decreased 2.4% or 4.5 million gallons to 184.5 million gallons compared to 189.0 million in the prior year. The decrease in gallons sold is primarily due to warmer temperatures during the winter heating season in all areas of the Partnership's operations. OPERATING EXPENSES. Operating expenses increased $95.4 million or 83.4% to $209.8 million in fiscal year 1997 compared to $114.4 million in the prior period. The increase is primarily due to fiscal 1997 representing twelve months of operations and fiscal 1996 representing seven months of operations, which commenced on the Partnership's initial public offering date. RESTRUCTURING CHARGES. Fiscal 1997 results reflect a restructuring charge of $6.9 million compared to a $2.3 million restructuring charge in fiscal 1996. In fiscal 1997, the Partnership recorded the restructuring charge to reorganize its product procurement and logistics group, redesign its fleet maintenance, field support and corporate office organizations and to provide for facilities to be closed and for impaired assets whose carrying amounts would not be recovered. In connection with this restructuring initiative, the Partnership terminated 307 employees and paid termination benefits of $1.6 million and $2.5 million in fiscal years 1997 and 1998, respectively, which were charged against the restructuring liability. In addition, the Partnership paid $1.0 million in fiscal 1997, primarily related to the closure of excess facilities, which was charged against the restructuring liability. The 1997 restructuring includes a charge of $1.8 million for impaired assets consisting of $1.2 million in information system assets and $0.6 million in excess fleet vehicles. The impaired asset write-offs reflect the remaining book value of certain information system assets as management believed the assets to be technologically obsolete with a minimal fair market value, and in the case of vehicles, the difference between the estimated trade-in value and book value. In fiscal 1996, the Partnership reorganized its corporate office and terminated 53 employees principally related to Corporate Support positions including the areas of Engineering, Marketing, Executive Management and Technical Training. The Partnership recorded a $2.3 million restructuring charge related to this effort and paid associated termination benefits of $1.0 million in fiscal 1997 and $0.3 million in fiscal 1998 which were charged against this provision. In addition, the Partnership paid $0.7 million in fiscal 1997 and $0.3 million in fiscal 1998 principally related to outplacement and legal costs related to the restructuring which were charged against the provision. The Partnership anticipates future reductions in operating and general and administrative expenses as a result of the restructuring efforts. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses excluding restructuring charges, increased $16.2 million or 98.8% to $32.6 million in fiscal 1997 compared to $16.4 million in the prior year. The increase is primarily due to fiscal 1997 representing twelve months of operations and fiscal 1996 representing seven months of operations, which commenced on the Partnership's initial public offering date. INTEREST EXPENSE. Net interest expense increased $16.8 million to $34.0 million in fiscal 1997 compared with $17.2 million in fiscal 1996. The increase is principally due to the issuance of $425.0 million in Senior Notes in connection with the Partnership's initial public offering in March 1996. RISK MANAGEMENT The Partnership engages in hedging transactions to reduce the effect of price volatility on its product costs and to help ensure the availability of propane during periods of short supply. The Partnership is currently a party to propane futures contracts on the New York Mercantile Exchange and enters into agreements to purchase and sell propane at fixed prices in the future. These activities are monitored by management through enforcement of the Partnership's Commodity Trading Policy. Hedging does not always result in increased product margins and the Partnership does not consider hedging activities to be material to operations or liquidity for the years ended September 26, 1998 and September 27, 1997. For additional information, see Item 7A of this Report. LIQUIDITY AND CAPITAL RESOURCES Due to the seasonal nature of the propane business, cash flows from operating activities are greater during the winter and spring seasons as customers pay for propane purchased during the heating season. In fiscal 1998, net cash provided by operating activities increased $11.2 million to $70.1 million compared to $58.8 million in fiscal 1997. The increase is primarily due to an increase in net income, exclusive of non-cash items, of $11.2 million. Changes in operating assets and liabilities reflect decreases in accounts receivable of $2.3 million, inventories of $6.3 million and accounts payable of $3.5 million principally due to the lower cost of propane. These decreases were partially offset by an increase in accrued employment and benefit costs of $6.6 million reflecting higher performance-related payroll accruals and an increase in deferred credits and other non-current liabilities of $3.0 million. Net cash provided by investing activities was $2.9 million in fiscal 1998, reflecting $12.6 million in capital expenditures (including $6.0 million for maintenance expenditures and $6.6 million to support the growth of operations) and $4.0 million of payments for acquisitions, offset by net proceeds of $6.5 million from the sale of property, plant and equipment and $13.1 million from the sale of the investment in the Dixie Pipeline Co. Net cash used in investing activities was $20.7 million in fiscal 1997, consisting of capital expenditures of $24.9 million (including $13.3 million for maintenance expenditures and $11.6 million to support the growth of operations) and acquisition payments of $1.9 million, offset by proceeds from the sale of property and equipment of $6.1 million. The decrease in cash used for capital expenditures of $12.3 million in fiscal 1998, when compared to the prior year, is primarily due to reductions in new customer equipment purchases and new vehicle purchases, as the Partnership has elected to lease new vehicles rather than purchase new vehicles. For fiscal year 1997, net cash provided by operating activities decreased $0.3 million or 0.6% to $58.8 million compared to $59.2 million for fiscal year 1996. Cash provided by operating activities during fiscal 1997 reflects increases in cash from accounts receivable of $23.1 million, prepaid and other current assets of $4.9 million and inventories of $11.8 million principally due to lower sales volumes and a resulting decline in propane purchases. These increases were offset by an aggregate decrease in accounts payable, accrued interest and accrued employment and benefit costs of $37.9 million and $4.3 million of cash expenditures incurred in connection with the Partnership's restructuring. Net cash used in investing activities was $52.4 million for fiscal year 1996, reflecting $25.9 million in capital expenditures and $28.5 million of payments for acquisitions offset by net proceeds of $2.0 million from the sale of property, plant and equipment. In March 1996, the Operating Partnership issued $425.0 million aggregate principal amount of Senior Notes with an interest rate of 7.54%. The Senior Notes mature June 30, 2011. The Senior Note Agreement requires that the principal be paid in equal annual payments of $42.5 million starting June 30, 2002. The Partnership has available a $25.0 million acquisition facility and a $75.0 million working capital facility. Borrowings under the Bank Credit Facilities bear interest at a rate based upon either LIBOR plus a margin, First Union National Bank's prime rate or the Federal Funds rate plus 1/2 of 1%. An annual fee ranging from .20% to .25% based upon certain financial tests is payable quarterly whether or not borrowings occur. The Bank Credit Facilities, which expire on September 30, 2000, are unsecured on an equal and ratable basis with the Operating Partnership's obligations under the Senior Notes. At September 26, 1998 and September 27, 1997, there were no amounts outstanding under the Bank Credit Facilities. The Senior Note Agreement and the Bank Credit Facilities contain various restrictive and affirmative covenants applicable to the Operating Partnership, including (a) maintenance of certain financial tests, (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 Operating Partnership was in compliance with all covenants and terms as of September 26, 1998. As a result of lower than anticipated earnings for fiscal 1997 and the costs associated with the restructuring efforts, the Partnership utilized $22.0 million of cash proceeds available under the Distribution Support Agreement between the Partnership and the General Partner in connection with the payment of the Minimum Quarterly Distribution on the Common Units with respect to the third and fourth fiscal quarters of 1997. The Partnership did not utilize proceeds available under the Distribution Support Agreement with respect to the funding of the Minimum Quarterly Distributions for fiscal 1998. The Distribution Support Agreement provides for a maximum of approximately $43.6 million in cash in return for APUs ($22.0 million of which has been utilized) to support the Partnership's Minimum Quarterly Distributions to holders of Common Units through March 31, 2001. The Partnership has not made a distribution on its Subordinated Units since the first fiscal quarter of 1997 and does not intend to make a distribution to the Subordinated Unitholder prior to consummation of the proposed Recapitalization. The Partnership will make distributions in an amount equal to all of its Available Cash approximately 45 days after the end of each fiscal quarter to holders of record on the applicable record dates. The Partnership has made distributions to holders of its Common Units for each of the quarters in fiscal 1998. The Partnership's anticipated cash requirements for fiscal 1999 include maintenance and growth capital expenditures of approximately $15.0 million for the repair and replacement of property, plant and equipment and approximately $32.0 million of interest payments on the Senior Notes. In addition, the Partnership intends to pay approximately $45.4 million in Minimum Quarterly Distributions to its Common Unitholders and in distributions to its General Partner during fiscal 1999. Based on its current cash position, available Bank Credit Facilities and expected cash from operating activities, the Partnership expects to have sufficient funds to meet these obligations for fiscal 1999, as well as all of its current obligations and working capital needs during fiscal 1999. In connection with the Recapitalization, the Operating Partnership will amend the Bank Credit Facilities to, among other things, (i) extend its maturity date to March 31, 2001, (ii) amend the minimum adjusted consolidated net worth covenant to reduce the required minimum net worth of the Operating Partnership from $125 to $50 million, (iii) provide for a $22 million liquidity subfacility to be available to finance certain shortfalls in the payment of the Minimum Quarterly Distribution, (iv) permit the Operating Partnership to borrow an amount sufficient to purchase the loan made to the Successor General Partner by Mellon Bank, N.A. to purchase the GP Interests and Incentive Distribution Rights from the Successor General Partner (the "GP Loan") if an event of default occurs under such loan, (v) decrease the maximum ratio of consolidated total indebtedness to EBITDA from 5.25 to 1.00 to 5.10 to 1.00, (vi) modify certain definitions and covenants relating to the ownership of the General Partner and the Operating Partnership, (vii) increase the Applicable Margins (as defined in the Bank Credit Facilities) and (viii) consent to the amendments to the Partnership Agreement and the Senior Note Agreement contemplated by the Recapitalization and to the termination of the Distribution Support Agreement. The Senior Note Agreement will be amended to, among other things, (i) reduce the minimum adjusted consolidated net worth requirement from $125 million to $50 million, (ii) create a financial covenant exception for non-recurring, non-cash charges to be incurred in connection with the Recapitalization, (iii) decrease the maximum ratio of consolidated total indebtedness to EBITDA from 5.25 to 5.10, with a further decrease to 5.00 effective as of April 1, 2001, and (iv) include a new interest coverage maintenance test requiring the Operating Partnership to maintain a ratio of consolidated EBITDA for any four fiscal quarters to consolidated interest expense for such period of at least 2.50 to 1.0. In addition, prior to the closing of the Recapitalization, the Partnership will obtain the consent of a majority of the holders of the Senior Notes to (i) the replacement of the General Partner with the Successor General Partner, (ii) the amendments to the Partnership Agreements necessary for the Recapitalization, (iii) the termination of the Distribution Support Agreement and (iv) the distribution by the Operating Partnership to the Partnership to permit the Partnership to pay the redemption price. In consideration for granting their consent to the foregoing, the Operating Partnership will pay a fee to each holder of Senior Notes in an amount equal to 0.375% of the outstanding principal amount of Senior Notes held by such holder. The total amount of such fees is expected to be $1.6 million. READINESS FOR YEAR 2000 The following disclosure is being made pursuant to the Year 2000 Readiness and Disclosure Act of 1998. Many information technology ("IT") and non-information technology ("non-IT") systems in use throughout the world today may not be able to properly interpret date related data from the year 1999 into the year 2000 (the "Y2K" issue). As a result, the Y2K issue could have adverse consequences upon the operations and information processing of many companies, including the Partnership. In the second half of 1997, the Partnership began to identify the Y2K exposure of its IT systems by focusing upon those systems and applications it considered critical to its ability to operate its business, supply propane to its customers, and accurately account for those services. The critical systems identified were the retail/sales, the human resources/payroll and the general ledger/financial accounting systems. Based upon the reasonable assurances of the software developers and vendors, the Partnership believes that it has replaced the human resources/payroll and the general ledger/financial accounting systems with Y2K compliant versions. In addition, the Partnership has retained the services of a third party vendor to assist in the remediation of its retail/sales system, as well as the majority of the programs supporting this system. The Partnership anticipates that the retail/sales system will be Y2K compliant by July 1999. The Partnership has also developed and is currently implementing a comprehensive Y2K project plan to identify and address both its non-critical IT and non-IT systems that could potentially be impacted by Y2K. In conjunction with this plan and in an effort to improve its business efficiency, the Partnership made the decision to replace all its computer hardware and PC-based computer software, as well as to migrate the majority of its network-based software to a server environment. According to the reasonable representations of the manufacturers, software developers and vendors, all of the newly purchased IT hardware and PC software are functionally Y2K compliant with some minor issues outstanding. The Partnership has assessed the non-IT systems utilized by its field locations to determine the Y2K compliance of those systems. With limited exceptions which are being addressed, the safety related devices at the Partnership's field locations do not incorporate electronic components and, as such, do not require Y2K remediation. The Partnership does not believe that the failure of any of its non-IT systems at any field location would have a material adverse impact upon it. As of December 17, 1998, the Partnership has incurred approximately $0.3 million to address its Y2K issues. It is currently estimated that the Partnership will spend between $1.5 and $2.0 million to complete its Y2K compliance program. This figure does not include the amounts spent to upgrade and replace computer hardware and PC-based software. The Partnership does not view the foregoing costs as having a material impact upon its overall financial position and has not delayed or eliminated any other scheduled computer upgrades or replacements due to the Y2K compliance project. In addition to testing the individual systems, the Partnership anticipates conducting an overall IT system Y2K compliance test by May 1999. The Partnership is developing a formal Y2K contingency plan that is to be in place prior to June 30, 1999, which will be based upon its overall disaster recovery plan. At this time, the Partnership anticipates that its Y2K contingency plan will be based upon manual processes and procedures. While propane itself is not date-dependent, the supply, transportation and consumption of propane is dependent upon third parties, beyond the control of the Partnership, which may have systems potentially impacted by the Y2K issue. The Partnership has contacted the 335 vendors/suppliers identified as being significant to its business and to date has received 249 written responses regarding Y2K from these parties. Within the group of significant vendors/suppliers, 78 firms have been identified as critical to the Partnership's business; 76 of these 78 firms have, to date, responded in writing to the Partnership's requests regarding Y2K. The responses received by the Partnership typically outline Y2K compliance programs in effect at these firms and disclose anticipated compliance dates ranging from the first to the fourth calendar quarters of 1999. No vendor/supplier has, to date, indicated that it will not be Y2K compliant by the fourth quarter of 1999. The Partnership intends to continue to follow up with vendors/suppliers who have not provided written responses and address potential issues contained in responses through the third calendar quarter of 1999. The Partnership believes that by obtaining these responses, it will be able to minimize any potential business interruption arising out of Y2K's impact upon these vendors/suppliers. Further, although the Y2K failure of any one customer will not have a material adverse effect upon the Partnership, if a significant percentage of either its customers and/or vendors/suppliers fail in achieving Y2K compliance, the Y2K issue may have a material adverse impact upon the Partnership's operations. Although the Partnership currently anticipates that its internal mission critical IT and non-IT systems will be Y2K compliant, it has taken steps to identify and mitigate Y2K compliance issues with its vendors/suppliers and customers and has begun to work on a Y2K contingency plan, the failure of a mission critical IT or non-IT system or the combined failure of vendors/suppliers and/or customers to achieve Y2K compliance could have a material adverse impact on the Partnership's operations and financial condition. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - ------------------------------------------------------------------- As of September 26, 1998, the Partnership was party to propane forward contracts with various third parties and futures traded on the New York Mercantile Exchange ("NYMEX"). Such contracts provide that the Partnership sell or acquire propane at a fixed price at fixed future dates. At expiration, the contracts are settled by the delivery of propane to the respective party or are settled by the payment of a net amount equal to the difference between the then current price of propane and the fixed contract price. The contracts are entered into for purposes other than trading in anticipation of market movements, and to manage and hedge exposure to fluctuating propane prices as well as to help ensure the availability of propane during periods of high demand. Market risks associated with the trading of futures and forward contracts are monitored daily for compliance with the Partnership's trading policy which includes volume limits for open positions. Open inventory positions are reviewed and managed daily as to exposures to changing market prices. MARKET RISK The Partnership is subject to commodity price risk to the extent that propane market prices deviate from fixed contract settlement amounts. Futures contracts traded with brokers of the NYMEX require daily cash settlements in margin accounts. Forward contracts are generally settled at the expiration of the contract term. CREDIT RISK Futures contracts are guaranteed by the NYMEX and as a result have minimal credit risk. The Partnership is subject to credit risk with forward contracts to the extent the counterparties do not perform. The Partnership evaluates the financial condition of each counterparty with which it conducts business and establishes credit limits to reduce exposure to credit risk of non-performance. SENSITIVITY ANALYSIS In an effort to estimate the Partnership's exposure to unfavorable market price changes in propane related to its open inventory positions, the Partnership developed a model which incorporated the following data and assumptions: A. The actual fixed price contract settlement amounts were utilized for each of the future periods. B. The estimated future market prices were derived from the New York Mercantile Exchange for traded propane futures for each of the future periods as of September 26, 1998. C. The market prices determined in B above were adjusted adversely by a hypothetical 10% and 25% change in each of the future periods and compared to the fixed contract settlement amounts in A above to project the additional loss in earnings which would be recognized for the respective scenario. Based on the sensitivity analysis described above, the hypothetical 10% and 25% adverse change in market prices for each of the future months for which a future and/or forward contract exists indicate potential losses in future earnings of $1.8 million and $4.5 million, respectively, as of September 26, 1998. 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. As of September 26, 1998, the Partnership's open position portfolio reflected a net long position (purchase) aggregating $21.6 million. As of December 17, 1998, the posted price of propane at Mont Belvieu, Texas (a major storage point) was 21 cents per gallon as compared to 26 cents per gallon at September 28, 1998, representing a 19% decline. Such decline is attributable to factors including warmer weather patterns, high national propane inventory levels and decreases in the market price of crude oil. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. - ---------------------------------------------------- The Partnership's Consolidated Financial Statements and the Reports of Independent Accountants thereon and the Supplementary Financial Information listed on the accompanying Index to Financial Statement Schedules are included herein. See Item 7 for Selected Quarterly Financial Data. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. - -------------------------------------------------------- None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. - ------------------------------------------------------------ PARTNERSHIP MANAGEMENT The Partnership Agreement provides that all management powers over the business and affairs of the Partnership are exclusively vested in its Board of Supervisors and, subject to the direction of the Board of Supervisors, the officers of the Partnership. No Unitholder has any management power over the business and affairs of the Partnership or actual or apparent authority to enter into contracts on behalf of, or to otherwise bind, the Partnership. Three independent Elected Supervisors, two Appointed Supervisors and two Management Supervisors serve on the Board of Supervisors pursuant to the terms of the Partnership Agreement. The three Elected Supervisors serve on the Audit Committee with the authority to review, at the request of the Board of Supervisors, specific matters as to which the Board of Supervisors believes there may be a conflict of interest in order to determine if the resolution of such conflict proposed by the Board of Supervisors is fair and reasonable to the Partnership. Any matters approved by the Audit Committee will be conclusively deemed to be fair and reasonable to the Partnership, approved by all partners of the Partnership and not a breach by the General Partner or the Board of Supervisors of any duties they may owe the Partnership or the Unitholders. In addition, the Audit Committee will review external financial reporting of the Partnership, will recommend engagement of the Partnership's independent accountants and will review the Partnership's procedures for internal auditing and the adequacy of the Partnership's internal accounting controls. PARTNERSHIP MANAGEMENT FOLLOWING RECAPITALIZATION The Amended Partnership Agreements to be adopted in connection with the Recapitalization will provide that, immediately following the closing of the Recapitalization, the size of the Board of Supervisors will be reduced from seven to five by eliminating the positions of the two supervisors now appointed by management. As a result, if the Recapitalization is approved, there will be three Elected Supervisors and two Appointed Supervisors and the Elected Supervisors will hold a majority of seats on the Board of Supervisors. The Elected Supervisors are expected to continue to be John Hoyt Stookey, Harold R. Logan and Dudley C. Mecum. The Appointed Supervisors are expected to be Mark A. Alexander, President and Chief Executive Officer of the Partnership, and Michael J. Dunn, Jr., Senior Vice President of the Partnership. Messrs. Alexander and Dunn currently serve as the two Supervisors appointed by the management of the Partnership under the Partnership Agreement. The three Elected Supervisors will continue to serve on the Audit Committee. BOARD OF SUPERVISORS AND EXECUTIVE OFFICERS OF THE PARTNERSHIP The following table sets forth certain information with respect to the members of the Board of Supervisors and executive officers of the Partnership as of December 3, 1998. Officers are elected for one-year terms and Supervisors are elected or appointed for three-year terms. POSITION WITH THE NAME AGE PARTNERSHIP - ---------------------------- --- ---------------------------------------- Mark A. Alexander........... 40 President and Chief Executive Officer; Member of the Board of Supervisors (Management Supervisor) Michael J. Dunn, Jr......... 49 Senior Vice President - Member of the Board of Supervisors (Management Supervisor) Anthony M. Simonowicz....... 48 Vice President and Chief Financial Officer Michael M. Keating.......... 45 Vice President -- Human Resources and Administration Thomas A. Nunan............. 65 Vice President -- Sales Edward J. Grabowiecki...... 36 Controller and Chief Accounting Officer George H. Hempstead, III.... 55 Member of the Board of Supervisors (Appointed Supervisor) John E. Lushefski........... 43 Member of the Board of Supervisors (Appointed Supervisor) John Hoyt Stookey........... 68 Member of the Board of Supervisors (Chairman and Elected Supervisor) Harold R. Logan, Jr......... 54 Member of the Board of Supervisors (Elected Supervisor) Dudley C. Mecum............. 63 Member of the Board of Supervisors (Elected Supervisor) Mr. Alexander serves as President and Chief Executive Officer of the Partnership and as a Management Supervisor of the Board of Supervisors. Prior to October 1, 1996, he served as Executive Vice Chairman and Chief Executive Officer of the Partnership. Mr. Alexander was Senior Vice President -- Corporate Development of Hanson Industries (Hanson's management division in the United States) from 1995 until March 4, 1996, where he was responsible for mergers and acquisitions, real estate and divestitures, and was Vice President of Acquisitions from 1989 to 1995. He was an Associate Director of Hanson from 1993 and a Director of Hanson Industries from June 1995 until March 4, 1996. Mr. Alexander is also a Director of the National Propane Gas Association. Mr. Dunn serves as Senior Vice President and Management Supervisor of the Partnership. Mr. Dunn was Vice President -- Procurement and Logistics of the Partnership from March 1997 until August 1998. Prior to joining the Partnership, Mr. Dunn was Vice President of Commodity Trading for Goldman Sachs & Company, New York, NY since 1981. Mr. Simonowicz serves as Vice President and Chief Financial Officer of the Partnership. Mr. Simonowicz was Vice President -- Business Development of the Partnership from March 1996 to March 1997. Mr. Simonowicz was Vice President -- Business Development of Suburban Propane from September 1995 until March 1996 and was Director -- Financial Planning and Analysis from 1991 to September 1995. Mr. Simonowicz was employed as Controller at Lifecodes Corporation (a genetic identification and research company), then a subsidiary of Quantum, from 1989 to 1991. Mr. Keating serves as Vice President -- Human Resources and Administration of the Partnership. Mr. Keating was Director of Human Resources at Hanson Industries from 1993 to July 1996 and was Director of Human Resources and Corporate Personnel at Quantum from 1989 to 1993. Mr. Nunan serves as Vice President -- Sales of the Partnership. Mr. Nunan was Vice President -- Sales of Suburban Propane from October 1990 until March 1996. He is currently a director and member of the Executive Committee of the National Propane Gas Association. Mr. Nunan is also a director of the Propane Education and Research Council and a director of the Propane Vehicle Council. Mr. Grabowiecki is the Controller and Chief Accounting Officer of the Partnership. Mr. Grabowiecki served as Director of Accounting Services of the Partnership from January 1996 to September 1996. Prior to joining the Partnership, Mr. Grabowiecki was a regional controller for Discovery Zone, Inc. from June 1993 to January 1996. Mr. Grabowiecki held several positions at Ernst & Young from 1984 to 1993, including Senior Manager from 1992 to 1993. Mr. Hempstead serves as an Appointed Supervisor of the Partnership. He is also Vice President and Secretary and a Director of the General Partner. He has served as Senior Vice President, Law and Administration of Millennium since October 1996, as Senior Vice President, Law and Administration of Hanson Industries from June 1995 to September 1996 as well as Senior Vice President and General Counsel of Hanson Industries from 1993 to 1995 and General Counsel of Hanson Industries from 1982 to 1993. He was an Associate Director of Hanson from 1990 to September 1996 and a Director of Hanson Industries from 1986 to September 1996. He joined Hanson Industries in 1976. Mr. Lushefski serves as an Appointed Supervisor of the Partnership. He is also a Vice President and Director of the General Partner. He has served as Senior Vice President and Chief Financial Officer of Millennium since October 1996. He was Senior Vice President and Chief Financial Officer of Hanson Industries from June 1995 until October 1996. He was Vice President and Chief Financial Officer of Peabody Holding Company, a Hanson subsidiary, from January 1991 to May 1995 and Vice President and Controller of Hanson Industries from 1990 to 1991. He originally joined Hanson Industries in 1985. Mr. Stookey is an Elected Supervisor and Chairman of the Board of Supervisors of the Partnership. He was the non-executive Chairman and a director of Quantum from the time it was acquired by Hanson on September 30, 1993 to October 31, 1995. From 1986 to September 30, 1993, he was the Chairman, President and Chief Executive Officer of Quantum. He is also a director of United States Trust Company of New York, ACX Technologies, Inc. and Cyprus Amax Minerals Company. Mr. Logan is an Elected Supervisor of the Partnership. Mr. Logan is Executive Vice President - Finance and Treasurer as well as a Director of TransMontaigne Inc. (a holding company formed to operate and purchase companies engaged in the marketing and distribution of petroleum products). From 1987 to 1995 he served as Senior Vice President of Finance and a Director of Associated Natural Gas Corporation (an independent gatherer and marketer of natural gas, natural gas liquids and crude oil which in 1994 was acquired by Panhandle Eastern Corporation). Mr. Logan is also a director of Snyder Oil Corporation (an oil and gas exploration and production company) and Union Bankshares Ltd. (a commercial bank). Mr. Mecum is an Elected Supervisor. Mr. Mecum is a Managing Director of Capricorn Holdings, LLC (a sponsor of and investor in leveraged buyouts). He was Chairman of Mecum Associates Inc. (management consultants) from June 1996 to June 1997. Mr. Mecum was a partner of G.L. Ohrstrom & Co. (a sponsor of and investor in leveraged buyouts) from 1989 to June, 1996. He is also a director of CITIGROUP, Travelers P&C Corp., Lyondell Chemical Company, Dyncorp, Vicorp Restaurants, Inc., Metris Industries, Inc. and CCC Information Systems Inc. ITEM 11. EXECUTIVE COMPENSATION - -------------------------------- SUMMARY COMPENSATION TABLE The following table sets forth a summary of all compensation awarded or paid to or earned by the chief executive officer and the four other most highly compensated executive officers of the Partnership in fiscal 1998. Mr. Dunn assumed the position of Senior Vice President in July 1998.
LONG TERM COMPENSATION RESTRICTED ALL ANNUAL COMPENSATION UNIT AWARDS (2) OTHER NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS(1)($) $ UNITS (#) COMPENSATION(4) - --------------------------- ---- ---------- ---------- - --------- ------------- Mark A. Alexander 1998 381,250 381,528 0 0 78,686 President and Chief Executive Officer 1997 375,000 100,000 1,953,000 97,561 18,756 1996 196,538 20,417 3,000,000 146,341 1,610 Michael J. Dunn, Jr. 1998 178,000 153,177 0 0 36,891 Sr. Vice President 1997 150,000 30,038 900,000 48,780 14,500 Anthony M. Simonowicz 1998 154,000 100,000 0 0 36,324 Vice President and Chief Financial Officer 1997 138,000 24,000 539,000 29,268 13,349 1996 120,000 6,000 400,000 19,512 125,500 (5) Kevin T. McIver 1998 146,000 73,153 0 0 17,161 Former Vice President and General Counsel 1997 145,000 19,333 251,000 13,415 4,350 1996 138,000 6,210 325,000 15,854 143,140 (5) Thomas A. Nunan 1998 145,000 72,500 0 (3) 0 (3) 16,775 Vice President - Sales 1997 145,000 19,358 0 0 9,850 1996 135,000 17,542 0 0 102,000 (5)
1 Bonuses are reported for the year earned, regardless of the year paid. 2 The aggregate dollar value of Restricted Unit Awards was computed by multiplying the number of Restricted Units granted by the closing market price on the date of grant. The Restricted Units are subject to a bifurcated vesting procedure such that: (i) 25% of the units vest over time with one-third vesting at the end of each third, fifth and seventh anniversaries from the date of grant in equal amounts (or upon a "change of control" of the Partnership); and the remaining 75% vest automatically upon, and in the same proportion as, the conversion of the Subordinated Units to Common Units, which conversion cannot commence prior to April 1999 under the Partnership Agreement (or upon a "change of control" of the Partnership). Until such Restricted Units vest, their holders will not be entitled to any distributions or allocations of income and loss, nor shall they have any voting or other rights with respect to such Common Units. At September 26, 1998, the number of Restricted Units and the aggregate value thereof (calculated at a per Unit price of $19.188, the closing price of Common Unit on September 25, 1998 as reported on the New York Stock Exchange) were 243,902 ($4,679,991)for Mr. Alexander, 48,780 ($935,990) for Mr. Dunn, 48,780 ($935,990) for Mr. Simonowicz, and 29,269 ($561,614) for Mr. McIver. 3 In lieu of participation in the Restricted Unit Plan, Mr. Nunan is entitled, subject to certain conditions, to receive cash payments of $221,030 in March 1999, $141,610 in March 2000 and $131,132 in March 2001. 4 These amounts include the following: a. Health and welfare payments for Messrs. Alexander, Dunn, Simonowicz and Nunan. Mr. McIver does not participate in the plan. b. Vehicle Allowances for Messrs. Alexander, Dunn, Simonowicz and McIver. c. Matching contributions under the Suburban Retirement Savings and Investment Plan for Messrs. Alexander, Dunn, Simonowicz, Nunan and McIver. 5 For fiscal year 1996, amounts for Messrs. Simonowicz, McIver and Nunan include success fees paid in connection with the Partnership's initial public offering. RETIREMENT BENEFITS The following table sets forth the annual benefits upon retirement at age 65 in 1998, without regard to statutory maximums, for various combinations of final average earnings and lengths of service which may be payable to Messrs. Alexander, Dunn, Simonowicz, McIver and Nunan under the Pension Plan for Eligible Employees of Suburban Propane, L.P. and Subsidiaries and the Suburban Propane Company Supplemental Executive Retirement Plan. Each such plan has been assumed by the Partnership and each such person will be credited for service earned under such plan to date. Messrs. Alexander, Dunn, Simonowicz, McIver and Nunan have 2 years, 1 year, 9 years, 15 years and 10 years service under the plans. PENSION PLAN ANNUAL BENEFIT FOR YEARS OF CREDITED SERVICE SHOWN (1),(2),(3),(4) Average Earnings 5 YRS. 10 YRS. 15 YRS. 20 YRS. 25 YRS. 30 YRS. 35 YRS. - -------- ------ ------- ------- ------- ------- ------- ------- $100,000 8,070 16,141 24,211 32,282 40,352 48,422 56,493 $200,000 16,820 33,641 50,461 67,282 84,102 100,922 117,743 $300,000 25,570 51,141 76,711 102,282 127,852 153,422 178,993 $400,000 34,320 68,641 102,961 137,282 171,602 205,922 240,243 $500,000 43,070 86,141 129,211 172,282 215,352 258,422 301,493 1 The Plans' definition of earnings consists of base pay only. 2 Annual Benefits are computed on the basis of straight life annuity amounts. The pension benefit is calculated as follows: the sum of (a) plus (b) multiplied by (c) where (a) is that portion of final average earnings up to 125% of social security Covered Compensation times 1.4% and (b) is that portion of final average earnings in excess of 125% of social security Covered Compensation times 1.75% and (c) is credited service up to maximum of 35 years. 3 Effective January 1, 1998, the Plan was amended to a cash balance benefit formula for current and future Plan participants. Initial account balances were established based upon the actuarial equivalent value of the accrued 12/31/97 Prior Plan benefit. Annual interest credits and pay-based credits will be credited to this account. The 1998 pay-based credits for Messrs. Alexander, Dunn, Simonowicz, McIver and Nunan are 2.5%, 1.5%, 2.0%, 7.0% and 2.0% respectively. Participants as of 12/31/97 will receive the greater of the cash balance benefit and the Prior Plan benefit through the year 2002. 4 In addition, a supplemental cash balance account was established equal to the value of certain benefits related to retiree medical and vacation benefits. An initial account value was determined for those active employees who were eligible for retiree medical coverage as of April 1, 1998 equal to $415 multiplied by years of benefit service (maximum of 35 years). Future pay-based credits and interest are credited to this account. The 1998 pay-based credits for Messrs. Alexander, Dunn, Simonowicz, McIver, and Nunan are 2.0%, 0.0%, 0.0%, 2.0% and 4.0% respectively. This account is payable in addition to the "grandfathered benefit calculations". In addition, certain additional retirement and life insurance benefits are payable to Mr. McIver pursuant to two Suburban Propane executive plans that were in effect prior to Quantum's acquisition of Suburban Propane in 1983. Under the Suburban Propane Deferred Compensation Plan, Mr. McIver is entitled, subject to certain conditions set forth in the Plan, which include remaining in the Partnership's employ until retirement, to receive a retirement supplement of approximately $21,000 per year for a ten-year period subsequent to retirement. Under the Suburban Propane Executive Death Benefit Plan, $100,000 of life insurance proceeds, on an after tax basis, are payable to Mr. McIver's estate, subject to the terms and conditions of the Plan, which include remaining in the employ of the Partnership until retirement. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN The Partnership has adopted a non-qualified, unfunded supplemental retirement plan known as the Supplemental Executive Retirement Plan. The purpose of the Plan is to provide certain executive officers with a level of retirement income from the Partnership, without regard to statutory maximums. Under the Plan, a participant's annual benefit, assuming retirement at age 65, is equal to (a) 1.4% of the participant's Average Final Compensation not in excess of 125% of Covered Compensation plus (b) 1.75% of the participant's Average Compensation in excess of 125% of Covered Compensation times (c) the participant's years of benefit service with the Partnership (not to exceed 35) minus (d) the Pension Offset. The defined terms in this paragraph will have the same meanings as in the Plan or in the Partnership's Qualified Retirement Plan. Messrs. Alexander, Dunn and Simonowicz currently participate in this Plan. RESTRICTED UNIT PLAN The Partnership has adopted a restricted unit plan (the "Restricted Unit Plan") for executives, managers and Elected Supervisors of the Partnership. The summary of the Restricted Unit Plan contained herein does not purport to be complete and is qualified in its entirety by reference to the Restricted Unit Plan, which has been filed as an exhibit to the Partnership's Registration Statement on Form S-1 (Registration No. 33-80605). Rights to acquire authorized but unissued Common Units of the Partnership with an aggregate value of $15.0 million are available under the Restricted Unit Plan for purposes of calculating the value of these Unit grants, a value of $20.50 (the initial public offering price of the Common Units) has been utilized. As of September 26, 1998, rights to acquire Common Units with an aggregate value of $12.7 million have been granted, subject to the vesting conditions described below and subject to other customary terms and conditions, as follows: (i) rights to acquire Common Units with an aggregate value of $5.0 million have been allocated to Mr. Alexander, (ii) rights to acquire Common Units with an aggregate value of $6.8 million were allocated to other participants in the Plan who are officers or managers of the Partnership's business, as determined by the Board of Supervisors or a compensation committee thereof, and (iii) rights to acquire Common Units with an aggregate value of $0.9 million were allocated among the three Elected Supervisors. The right to acquire the remaining $2.3 million of the $15.0 million aggregate value of Available Units have been reserved and may be allocated or issued in the future to executives and managers on such terms and conditions (including vesting conditions) as are described below or as the Board of Supervisors, or a compensation committee thereof, shall determine. Without the consent of the General Partner, such awards to executives or managers cannot be made to prior award recipients except on terms and conditions substantially identical to the awards previously received. Each Elected Supervisor subsequently appointed or elected will receive rights to acquire Common Units with a value of $0.3 million on the same terms and conditions as those granted to the three initial Elected Supervisors. The Units are subject to a bifurcated vesting procedure such that (i) twenty-five percent of the Units will vest over time (or upon a "change of control" of the Partnership as defined in the Restricted Unit Plan, if earlier) with one-third of such units vesting at the end of the third, fifth and seventh anniversaries from the date of grant, and (ii) the remaining seventy-five percent of the Units will vest automatically upon, and in the same proportions as, the conversion of the Subordinated Units to Common Units (or upon a "change of control" of the Partnership as defined in the Restricted Unit Plan, if earlier). The proposed Recapitalization and related sale of the General Partner interests will constitute a change of control under the Plan, resulting in vesting of all outstanding Units. Upon vesting in accordance with the terms and conditions of the Restricted Unit Plan, Common Units allocated to a plan participant will be issued to such a participant. Until such allocated, but unissued, Common Units have vested and have been issued to a participant, such participant shall not be entitled to any distributions or allocations of income or loss and shall not have any voting or other rights in respect of such Common Units. The issuance of the Common Units pursuant to the Restricted Unit Plan is intended to serve as a means of incentive compensation for performance and not primarily as an opportunity to participate in the equity appreciation in respect of the Common Units. Therefore, no consideration will be payable by the plan participants upon vesting and issuance of the Common Units. LONG-TERM INCENTIVE PLAN The Partnership has adopted a non-qualified, unfunded long-term incentive plan for officers and key employees, effective October 1, 1997. Awards are based on a percentage of base pay and are subject to the achievement of certain performance contingencies, including the Partnership's ability to earn sufficient funds and make cash distributions on its common and subordinated units with respect to each fiscal year. Awards vest over time with one-third vesting at the end of years three, four, and five from the award date. Long-Term Incentive Plan awards earned in fiscal year 1998 are: PERFORMANCE OR OTHER PERIOD AWARD UNTIL MATURATION POTENTIAL AWARDS UNDER PLAN NAME FY 1998 OR PAYOUT THRESHOLD TARGET MAXIMUM - ---- ------- --------- --------- ------ ------- Mark A. Alexander $57,230 3-5 Years $ 0 $57,230 $114,460 Michael J. Dunn, Jr. 23,970 3-5 Years 0 23,970 47,940 Anthony M. Simonowicz 15,015 3-5 Years 0 15,015 30,030 Kevin T. McIver 10,950 3-5 Years 0 10,950 21,900 Thomas A. Nunan 10,875 3-5 Years 0 10,875 21,750 EMPLOYMENT AGREEMENTS The Partnership entered into an employment agreement (the "Employment Agreement") with Mr. Alexander ("Executive") which became effective March 5, 1996 and was amended October 23, 1997. The summary of such Employment Agreement contained herein does not purport to be complete and is qualified in its entirety by reference to the Employment Agreement. Mr. Alexander's Employment Agreement has an initial term of three years but automatically renews for successive one-year periods, unless earlier terminated by the Partnership or by Mr. Alexander or otherwise terminated in accordance with the Employment Agreement. The Employment Agreement for Mr. Alexander provides for an annual base salary of $380,000 as of September 26, 1998. In addition, Mr. Alexander may earn a bonus up to 100% of annual base salary (the "Maximum Annual Bonus") for services rendered based upon certain performance criteria. The Employment Agreement also provides for the opportunity to participate in benefit plans made available to other senior executives and senior managers of the Partnership, including the Restricted Unit Plan. The Partnership also provides Mr. Alexander with term life insurance with a face amount equal to three times his annual base salary. Mr. Alexander also participates in a non-qualified supplemental retirement plan which provides retirement income which could not be provided under the Partnership's qualified plans by reason of limitations contained in the Internal Revenue Code. If a "change of control" (as defined in the Employment Agreement) of the Partnership occurs and within six months prior thereto or at any time subsequent to a change of control the Partnership terminates the Executive's employment without "cause" or the Executive resigns with "good reason", then the Executive will be entitled to (i) a lump sum severance payment equal to three times the sum of his annual base salary in effect as of the date of termination and the Maximum Annual Bonus, and (ii) medical benefits for three years from the date of such termination. The Employment Agreement provides that if any payment received by the Executive is subject to the 20% federal excise tax under Section 4999 of the Code, the payment will be grossed up to permit the Executive to retain a net amount on an after-tax basis equal to what he would have received had the excise tax not been payable. SEVERANCE PROTECTION PLAN FOR KEY EXECUTIVES The Partnership has adopted a Severance Protection Plan which provides the Partnership's officers and key employees with employment protection for one year following a "change of control" as defined in the Plan. This plan provides for severance payments equal to sixty-five weeks of base pay and target bonus for such officers and key employees following a change of control and termination of employment. Pursuant to Severance Protection Agreements, Messrs. Dunn and Simonowicz, as executive officers of the Partnership, have been granted severance protection payments of 78 weeks of base pay and target bonuses following a change in control and termination of employment in lieu of participation in the Severance Protection Plan. COMPENSATION OF SUPERVISORS Mr. Stookey receives annual compensation of $75,000 for his services to the Partnership. The other two Elected Supervisors receive $15,000 per year, plus $1,000 per meeting of the Board of Supervisors or committee thereof attended. In addition, each Elected Supervisor participates in the Restricted Unit Plan and has received Unit Awards with a value of $0.3 million. All Elected Supervisors receive reimbursement of reasonable out-of-pocket expenses incurred in connection with meetings of the Board of Supervisors. The Partnership does not expect to pay any additional remuneration to its employees (or employees of any of its affiliates) or employees of the General Partner or any of its affiliates for serving as members of the Board of Supervisors. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION DECISIONS Compensation of the executive officers of the Partnership is determined by the Compensation Committee of its Board of Supervisors. The Compensation Committee is comprised of Messrs. Stookey, Logan and Hempstead who are not officers or employees of the Partnership. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. - ------------------------------------------------------------ The following table sets forth certain information as of December 17, 1998 regarding the beneficial ownership of Common Units, Subordinated Units, APUs and Incentive Distribution Rights by each person or group known by the Partnership (based upon filings under Section 13(d) or (g) under The Securities Exchange Act of 1934) to own beneficially more than 5% thereof, each member of the Board of Supervisors, each executive officer named in the Summary Compensation table and all members of the Board of Supervisors and executive officers as a group. Except as set forth in the notes to the table, the business address of each person in the table is c/o the Partnership, 240 Route 10 West, Whippany, New Jersey 07981-0206. Each individual or entity listed below has sole voting and investment power over the Units reported, except as noted below. SUBURBAN PROPANE, L.P. - ---------------------- NAME AMOUNT AND NATURE OF PERCENT TITLE OF CLASS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS - -------------- ------------------- -------------------- -------- Common Units Mark A. Alexander 20,000 .093% Michael J. Dunn, Jr. 0 -- Anthony M. Simonowicz 2,000 .009% Thomas A. Nunan 2,500 .012% Edward J. Grabowiecki 200 .001% George H. Hempstead, III (a) (b) 0 -- John E. Lushefski (a) (b) 0 -- John Hoyt Stookey 10,000 .046% Harold R. Logan, Jr. 2,500 .012% Dudley C. Mecum 1,000 .005% All Members of the Board of Supervisors and Executive Officers as a Group (11 persons) 38,200 .177% Subordinated Units Suburban Propane GP, Inc. (c) 7,163,750 (d) 100.0% As executive officers of Millennium, Messrs. Hempstead and Lushefski have shared voting and investment power over the Subordinated Units. Messrs. Hempstead and Lushefski disclaim beneficial ownership of the Subordinated Units. APUs Suburban Propane GP, Inc. (c) 220,000 (d) 100.0% General Partner Interest Suburban Propane GP, Inc. (c) 2% 100.0% Incentive Distribution Rights Suburban Propane GP, Inc. (c) N/A N/A (a) The business address of such Supervisor is c/o Millennium Chemicals Inc., 230 Half Mile Road, Red Bank, New Jersey 07701. (b) Pursuant to the Recapitalization Agreement, Messrs. Hempstead and Lushefski will resign as Supervisors effective as of the Closing of the Recapitalization. (c) Suburban Propane GP, Inc. is the General Partner and is an indirect wholly-owned subsidiary of Millennium Chemicals Inc. The business address of Suburban Propane GP, Inc. is 230 Half Mile Road, Red Bank, New Jersey 07701. (d) Will be redeemed in the Recapitalization. If the Recapitalization is completed, the Subordinated Units and APUs will be redeemed and the general partner interest in the Partnership currently held by Suburban Propane GP, Inc. will be sold to Suburban Energy Services Group LLC, a new entity owned by senior management of the Partnership. BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Exchange Act requires the Partnership's directors and executive officers to file initial reports of ownership and reports of changes in ownership of the Company's Common Units with the Securities and Exchange Commission. Directors and executive officers are required to furnish the Partnership with copies of all Section 16(a) forms that they file. Based on a review of these filings, the Partnership believes that all such filings were made timely during the 1998 fiscal year. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. - -------------------------------------------------------- RIGHTS OF THE GENERAL PARTNER The General Partner owns all of the Subordinated Units, representing an aggregate 24.4% limited partner interest in the Partnership. Millennium Petrochemicals owns 100% of the capital stock of the General Partner. Through the General Partner's ability, as general partner, to control the election of the two Appointed Supervisors of the Partnership, its right as general partner to approve certain Partnership actions, its ownership of all of the outstanding Subordinated Units and its right to vote the Subordinated Units as a separate class on certain matters, the General Partner and its affiliates have the ability to exercise significant influence regarding management of the Partnership. DISTRIBUTION SUPPORT AGREEMENT The Partnership and the General Partner have entered into the Distribution Support Agreement which is intended to enhance the Partnership's ability to make the Minimum Quarterly Distribution on the Common Units during the Subordination Period. Pursuant to the Distribution Support Agreement, the General Partner has agreed to contribute cash, in exchange for APUs to enable the Partnership to distribute the Minimum Quarterly Distribution up to a maximum of approximately $44.3 million. Through December 3, 1998, the General Partner has contributed a total of $22.0 million to the Partnership and received 220,000 APUs in consideration thereof. Millennium (the "APU Guarantor") has agreed pursuant to the Distribution Support Agreement to guarantee the General Partner's APU contribution obligation. The Unitholders have no independent right separate and apart from the Partnership to enforce the General Partner's or the APU Guarantor's obligations under the Distribution Support Agreement. The Distribution Support Agreement will be terminated upon consummation of the proposed Recapitalization and will be replaced with a $21.6 million liquidity arrangement established by the Partnership consisting of either a deposit in certain highly liquid securities or a letter of credit with a reputable bank or a combination of both. See "Proposed Recapitalization in Item 1 of this Report". PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K - ------------------------------------------------------------------------ (a) The following documents are filed as part of this Report: 1. (i) Financial Statements See "Index to Financial Statements" set forth on page F-1. (ii) Supplemental Financial Information Consolidated Balance Sheet of Millennium America Inc. as guarantor of Suburban Propane GP, Inc.'s obligations under the Distribution Support Agreement. See "Index to Supplemental Financial Information" set forth on page F-22. 2. Financial Statement Schedule. See "Index to Financial Statement Schedule" set forth on page S-1. 3. Exhibits See "Index to Exhibits" set forth on page E-1. Management Contracts and Compensatory Plans and Arrangements - Employment Agreement dated as of March 5, 1996 between the Operating Partnership and Mr. Alexander (filed as Exhibit 10.6 to the Partnership's Current Report on Form 8-K filed on April 29, 1996). - First Amendment to Employment Agreement dated as of March 5, 1996 between the Operating Partnership and Mr. Alexander entered into as of October 23, 1997 (filed as Exhibit 10.7 to the Partnership's Annual Report on Form 10-K for the fiscal year ended September 27, 1997). - The Partnership's 1996 Restricted Unit Plan (filed as Exhibit 10.8 to the Partnership's Current Report on Form 8-K filed on April 29, 1996). - Form of Unit Grant Agreement pursuant to the Partnership's 1996 Restricted Unit Plan (filed as Exhibit 10.9 to the Partnership's Current Report on Form 8-K filed on April 29, 1996). - The Partnership's Supplemental Executive Retirement Plan (filed as Exhibit 10.11 to the Partnership's Annual Report on Form 10-K for the fiscal year ended September 28, 1996). - The Partnership's Severance Protection Plan dated September 1996 (filed as Exhibit 10.12 to the Partnership's Annual Report on Form 10-K for the fiscal year ended September 28, 1996). (b) Reports on Form 8-K Report on Form 8-K dated December 3, 1998 announcing the Partnership's Recapitalization Plan. SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) 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. By: /S/ MARK A. ALEXANDER ------------------------- Mark A. Alexander President, Chief Executive Officer and Management Supervisor Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: SIGNATURE TITLE DATE --------- ----- ---- /S/ MICHAEL J. DUNN, JR. Management Supervisor April 22, 1999 - ------------------------ (Michael J. Dunn, Jr.) /S/ GEORGE H. HEMPSTEAD, III Appointed Supervisor April 22, 1999 - ---------------------------- (George H. Hempstead, III) /S/ JOHN E. LUSHEFSKI Appointed Supervisor April 22, 1999 - --------------------- (John E. Lushefski) /S/ JOHN HOYT STOOKEY Elected Supervisor April 22, 1999 - --------------------- (John Hoyt Stookey) /S/ HAROLD R. LOGAN, JR. Elected Supervisor April 22, 1999 - ------------------------ (Harold R. Logan, Jr.) /S/ DUDLEY C. MECUM Elected Supervisor April 22, 1999 - ------------------- (Dudley C. Mecum) /S/ ANTHONY M. SIMONOWICZ Vice President and Chief April 22, 1999 - -------------------------- Financial Officer of Suburban (Anthony M. Simonowicz) Propane Partners, L.P. /S/ EDWARD J. GRABOWIECKI Controller and Chief Accounting April 22, 1999 - ------------------------- Officer of Suburban Propane (Edward J. Grabowiecki) Partners, L.P. INDEX TO EXHIBITS The exhibits listed on this Exhibit Index are filed as part of this report. Exhibits required to be filed by Item 601 of Regulation S-K which are not listed are not applicable. Exhibit Number Description ------ ----------- **** 2.1 Recapitalization Agreement dated as of November 27, 1998 by and among the Partnership, the Operating Partnership, the General Partner, Millennium and Suburban Energy Services Group LLC. * 3.1 Amended and Restated Agreement of Limited Partnership of the Partnership dated as of March 4, 1996. * 3.2 Amended and Restated Agreement of Limited Partnership of the Operating Partnership dated as of March 4, 1996. *** 10.1 Amended and Restated Credit Agreement dated as of September 30, 1997 among the Operating Partnership, First Union National Bank, as administrative agent, and certain banks. * 10.2 Note Agreement dated as of February 28, 1996 among certain investors and the Operating Partnership relating to $425 million aggregate principal amount of 7.54% Senior Notes due June 30, 2011. * 10.3 Contribution, Conveyance and Assumption Agreement dated as of March 4, 1996 among the Partnership, the Operating Partnership, Quantum, the General Partner and the Service Company. * 10.4 Computer Services Agreement dated as of March 5, 1996 between Quantum and the Operating Partnership. * 10.5 Distribution Support Agreement dated as of March 5, 1996 among the Partnership, the General Partner and Millennium. * 10.6 Employment Agreement dated as of March 5, 1996 between the Operating Partnership and Mr. Alexander. *** 10.7 First Amendment to Employment Agreement dated as of March 5, 1996 between the Operating Partnership and Mr. Alexander entered into as of October 23, 1997. * 10.8 The Partnership's 1996 Restricted Unit Plan. * 10.9 Form of Unit Grant Agreement pursuant to the Partnership's 1996 Restricted Unit Plan. E-1 Exhibit Number Description ------ ----------- ** 10.11 The Partnership Supplemental Executive Retirement Plan (effective as of March 5, 1996). ** 10.12 The Partnership's Severance Protection Plan dated September 1996. ***** 10.13 Suburban Propane L.P. Long-Term Incentive Program. ** 21.1 Listing of Subsidiaries of the Partnership. ******23.1 Consent of Independent Accountants. ******23.2 Consent of Independent Accountants. ***** 27.1 Financial Data Schedule. - -------------------------------------------------------------------------------- * Incorporated by reference to the same numbered Exhibit to the Partnership's Current Report Form 8-K filed April 29, 1996. ** Incorporated by reference to the same numbered Exhibit to the Partnership's Annual Report on Form 10-K for the fiscal year ended September 28, 1996. *** Incorporated by reference to the same numbered Exhibit to the Partnership's Annual Report on Form 10-K for the fiscal year ended September 27, 1997. **** Incorporated by reference to Exhibit 2.1 to the Partnership's Form 8-K filed December 3, 1998. ***** Incorporated by reference to the same numbered Exhibit to the Partnership's Annual Report on Form 10-K for the fiscal year ended September 28, 1998. ******Filed herewith. E-2 INDEX TO FINANCIAL STATEMENTS SUBURBAN PROPANE PARTNERS, L.P. AND SUBSIDIARIES PAGE ---- Reports of Independent Accountants...................................... F-2 Consolidated Balance Sheets-September 26, 1998 and September 27, 1997... F-4 Consolidated Statements of Operations - Years Ended September 26, 1998, September 27, 1997 and September 28, 1996 (Combined)..................................... F-5 March 5, 1996 through September 28, 1996 October 1, 1995 through March 4, 1996 (Predecessor) Consolidated Statements of Cash Flows - Years Ended September 26, 1998, September 27, 1997 and September 28, 1996 (Combined) .................................... F-6 March 5, 1996 through September 28, 1996 and October 1, 1995 through March 4, 1996 (Predecessor) Consolidated Statements of Partners' Capital - Years Ended September 26, 1998 and September 27, 1997 March 5, 1996 through September 28, 1996.............................. F-7 Notes to Consolidated Financial Statements.............................. F-8 F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Supervisors and Unitholders of Suburban Propane Partners, L.P. In our opinion, the consolidated financial statements listed in the indices referred to under Item 14(a) 1 and 2 and appearing on pages F-1 and S-1 present fairly, in all material respects, the financial position of Suburban Propane Partners, L.P. and its subsidiaries (the "Partnership") at September 26, 1998 and September 27, 1997, and the results of its operations and its cash flows for the years then ended and the period March 5, 1996 to September 28, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Partnership's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Florham Park, NJ December 8, 1998 F-2 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders Quantum Chemical Corporation In our opinion, the financial statements listed in the indices referred to under Item 14(a) 1 and 2 and appearing on pages F-1 and S-1 present fairly, in all material respects, the Suburban Propane division of Quantum Chemical Corporation results of operations and cash flows for the period October 1, 1995 to March 4, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP Florham Park, NJ October 21, 1996 F-3 SUBURBAN PROPANE PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands) September 26, September 27, 1998 1997 ------------- ------------- ASSETS Current assets: Cash and cash equivalents ...................... $ 59,819 $ 19,336 Accounts receivable, less allowance for doubtful accounts of $2,382 and $2,682, respectively 39,134 45,927 Inventories .................................... 29,962 31,915 Prepaid expenses and other current assets ...... 3,866 7,183 --------- --------- Total current assets ...................... 132,781 104,361 Property, plant and equipment, net .................. 343,828 364,347 Net prepaid pension cost ............................ 34,556 48,598 Goodwill and other intangible assets, net ........... 214,782 219,017 Other assets ........................................ 3,618 9,311 --------- --------- Total assets .............................. $ 729,565 $ 745,634 ========= ========= LIABILITIES AND PARTNERS' CAPITAL Current liabilities: Accounts payable ............................... $ 31,315 $ 37,785 Accrued employment and benefit costs ........... 20,926 19,957 Accrued insurance .............................. 4,830 5,280 Customer deposits and advances ................. 16,241 12,795 Accrued interest ............................... 8,198 8,306 Other current liabilities ...................... 10,040 12,578 --------- --------- Total current liabilities ................. 91,550 96,701 Long-term debt ...................................... 427,897 427,970 Postretirement benefits obligation .................. 35,980 51,123 Accrued insurance ................................... 16,574 18,468 Other liabilities ................................... 9,764 10,133 --------- --------- Total liabilities ......................... 581,765 604,395 --------- --------- Partners' capital: Common Unitholders ............................. 84,847 100,476 Subordinated Unitholder ........................ 49,147 39,835 General Partner ................................ 24,488 12,830 Unearned compensation .......................... (10,682) (11,902) --------- --------- Total partners' capital ................... 147,800 141,239 --------- --------- Total liabilities and partners' capital ... $ 729,565 $ 745,634 ========= ========= The accompanying notes are an integral part of these consolidated financial statements. F-4 SUBURBAN PROPANE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per Unit amounts) MARCH 5, 1996 OCTOBER 1, 1995 THROUGH THROUGH SEPTEMBER 26, SEPTEMBER 27, SEPTEMBER 28, MARCH 4, 1996 1998 1997 1996 (PREDECESSOR) ------------ ------------- ------------- ------------- Revenues Propane ............................... $598,599 $700,767 $289,058 $352,621 Other ................................. 68,688 70,364 34,889 31,378 -------- -------- -------- -------- 667,287 771,131 323,947 383,999 -------- -------- -------- -------- Costs and expenses Cost of sales ......................... 326,440 436,795 173,201 204,491 Operating ............................. 202,946 209,799 114,436 88,990 Depreciation and amortization.......... 36,531 37,307 21,046 14,816 Selling, general and administrative expenses ............................. 37,646 32,556 16,388 12,616 Management fee ........................ -- -- -- 1,290 Restructuring charge .................. -- 6,911 2,340 -- -------- -------- -------- -------- 603,563 723,368 327,411 322,203 -------- -------- -------- -------- Income (loss) before interest expense and income taxes ......................... 63,724 47,763 (3,464) 61,796 Interest expense, net ...................... 30,614 33,979 17,171 -- -------- -------- -------- -------- Income (loss) before provision for income taxes ......................... 33,110 13,784 (20,635) 61,796 Provision for income taxes ................. 35 190 147 28,147 -------- -------- -------- -------- Net income (loss) $ 33,075 $ 13,594 $(20,782) $ 33,649 ======== ======== ======== ======== General Partner's interest in net loss ..... $ 763 $ 272 $ (416) -------- -------- -------- Limited Partners' interest in net loss ..... $ 37,402 $ 13,322 $(20,366) ======== ======== ======== Basic and diluted net loss per Unit ........ $ 1.30 $ 0.46 $ (0.71) ======== ======== ======== Weighted average number of Units outstanding 28,726 28,726 28,726 -------- -------- --------
The accompanying notes are an integral part of these consolidated financial statements. F-5 SUBURBAN PROPANE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) OCTOBER 1, 1995 MARCH 5, 1996 THROUGH SEPTEMBER 26, SEPTEMBER 27, THROUGH MARCH 4, 1996 1998 1997 SEPTEMBER 28, 1996 (PREDECESSOR) ------------- ------------- ------------------ --------------- Cash flows from operating activities: Net income (loss) ...................................... $ 38,165 $ 13,594 $ (20,782) $ 33,649 Adjustments to reconcile net income (loss) to net cash provided by (used in) operations: Depreciation ...................................... 29,166 29,718 16,887 12,033 Amortization ...................................... 7,365 7,589 4,159 2,783 Restructuring charge .............................. -- 6,911 2,340 -- (Gain) on disposal of equipment ................... (5,090) -- -- -- (Gain) on disposal of property, plant and equipment .................................. (1,391) (774) (156) (85) Changes in operating assets and liabilities, net of acquisitions and dispositions: Decrease/(increase) in accounts receivable ........ 6,793 9,094 42,667 (56,643) Decrease/(increase) in inventories ................ 1,953 8,258 (6,339) 2,829 Decrease/(increase) in prepaid expenses and other current assets ....................... 3,317 (616) (3,691) (1,874) (Decrease)/increase in accounts payable ........... (6,470) (2,945) 9,097 9,335 Increase/(decrease) in accrued employment and benefit costs .............................. 1,595 (5,031) 1,111 2,303 (Decrease)/increase in accrued interest ........... (108) 84 8,222 -- Increase/(decrease) in other accrued liabilities .. 458 (112) 8,947 (3,530) Other noncurrent assets ................................ (2,853) (1,138) (1,669) (1,203) Deferred credits and other noncurrent liabilities ...... (2,827) (5,784) 2,168 (3,362) ------------- ------------- ------------------ --------------- Net cash provided by (used in) operating activities.. 70,073 58,848 62,961 (3,765) ------------- ------------- ------------------ --------------- Cash flows from investing activities: Capital expenditures ................................... (12,617) (24,888) (16,089) (9,796) Acquisitions ........................................... (4,041) (1,880) (15,357) (13,172) Proceeds from the sale of investment ................... 13,090 -- -- -- Proceeds from the sale of property, plant and equipment ........................................ 6,468 6,059 997 1,003 ------------- ------------- ------------------ --------------- Net cash provided by (used in) investing activities.. 2,900 (20,709) (30,449) (21,965) ------------- ------------- ------------------ --------------- Cash flows from financing activities: Cash activity with parent, net ......................... -- -- -- 25,799 Proceeds from settlement with former parent ............ -- -- 5,560 -- Proceeds from debt placement ........................... -- -- 425,000 -- Proceeds from Common Unit offering ..................... -- -- 413,569 -- Debt placement and credit agreement expenses ........... -- -- (6,224) -- Proceeds from General Partner APU contribution ......... 12,000 10,000 -- -- Cash distribution to General Partner ................... -- -- (832,345) -- Debt repayment ......................................... (260) (299) -- -- Partnership distribution ............................... (44,230) (47,435) (19,346) -- ------------- ------------- ------------------ --------------- Net cash (used in) provided by financing activities... (32,490) (37,734) (13,786) 25,799 ------------- ------------- ------------------ --------------- Net increase in cash and cash equivalents ............... 40,483 405 18,726 69 Cash and cash equivalents at beginning of period ........ 19,336 18,931 205 136 ------------- ------------- ------------------ --------------- Cash and cash equivalents at end of period .............. $ 59,819 $ 19,336 $ 18,931 $ 205 ============= ============= ================== =============== Supplemental disclosure of cash flow information: Cash paid for interest ................................. $ 32,659 $ 32,836 $ 10,550 $ -- ============= ============= ================== =============== Non-cash investing and financing activities Assets acquired by incurring note payable .............. $ 250 $ -- $ 3,528 $ -- ============= ============= ================== ===============
The accompanying notes are an integral part of these consolidated financial statements. F-6 SUBURBAN PROPANE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL (IN THOUSANDS) Unearned Total Number of Units General Compensation Partners' Common Subordinated Common Subordinated Partner Restricted Units Capital ------ ------------ ------ ------------ ------- ---------------- --------- Balance at March 5, 1996 ........ -- -- -- -- -- -- -- Contribution in connection with formation of the Partnership and issuance of Common Units ........ 21,562 7,164 $ 150,488 $ 49,890 $ 4,089 $ 204,467 Partnership distribution ........ (14,239) (4,720) (387) (19,346) Grants under Restricted Unit Plan 8,330 $ (8,330) -- Amortization of Restricted Unit compensation ............... 340 340 Net Loss ........................ -- -- (15,296) (5,070) (416) -- (20,782) ------- -------- --------- -------- -------- --------- --------- Balance at September 28, 1996 ... 21,562 7,164 129,283 40,100 3,286 (7,990) 164,679 Grants under Restricted Unit Plan 4,313 (4,313) -- Partnership distribution ........ (43,125) (3,582) (728) (47,435) Amortization of Restricted Unit compensation ............... 401 401 APU contribution (100 Units) .... 10,000 10,000 Net Income ...................... -- -- 10,005 3,317 272 -- 13,594 ------- -------- --------- -------- -------- --------- --------- Balance at September 27, 1997 ... 21,562 7,164 100,476 39,835 12,830 (11,902) 141,239 Net grants forfeited under Restricted Unit Plan ............ (594) 594 -- Partnership distribution ........ (43,125) (1,105) (44,230) Amortization of Restricted Unit compensation ............... 626 626 APU contribution (120 Units) .... 12,000 12,000 Net Income ...................... -- -- 28,090 9,312 763 -- 38,165 ------- -------- --------- -------- -------- --------- --------- Balance at September 26, 1998 ... 21,562 7,164 $ 84,847 $ 49,147 $ 24,488 $ (10,682) $ 147,800 ======= ======== ========= ======== ======== ========= =========
The accompanying notes are an integral part of these consolidated financial statements. F-7 SUBURBAN PROPANE PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 26, 1998 (Dollars in thousands) 1. PARTNERSHIP ORGANIZATION AND FORMATION Suburban Propane Partners, L.P. (the "Partnership") was formed on December 19, 1995 as a Delaware limited partnership. The Partnership and its subsidiary, Suburban Propane, L.P. (the "Operating Partnership"), were formed to acquire and operate the propane business and assets of Suburban Propane, a division of Quantum Chemical Corporation (the "Predecessor Company"). In addition, Suburban Sales & Service, Inc. (the "Service Company"), a subsidiary of the Operating Partnership, was formed to acquire and operate the service work and appliance and parts businesses of the Predecessor Company. The Partnership, the Operating Partnership and the Service Company are collectively referred to hereinafter as the "Partnership Entities". The Partnership Entities commenced operations on March 5, 1996 (the "Closing Date") upon consummation of an initial public offering of 18,750,000 Common Units representing limited partner interests in the Partnership (the "Common Units"), the private placement of $425,000 aggregate principal amount of Senior Notes due 2011 issued by the Operating Partnership (the "Senior Notes") and the transfer of all the propane assets (excluding the net accounts receivable balance) of the Predecessor Company to the Operating Partnership and the Service Company. On March 25, 1996, the underwriters of the Partnership's initial public offering exercised an over-allotment option to purchase an additional 2,812,500 Common Units. Suburban Propane GP, Inc. (the "General Partner") is a wholly-owned subsidiary of Millennium Petrochemicals Inc., ("Millennium Petrochemicals"), formerly Quantum Chemical Corporation ("Quantum") and serves as the general partner of the Partnership and the Operating Partnership. Both the General Partner and Millennium Petrochemicals are indirect wholly-owned subsidiaries of Millennium Chemicals Inc. ("Millennium") which was formed as a result of Hanson PLC's (the "Parent Company") demerger in October 1996. The General Partner holds a 1% general partner interest in the Partnership and a 1.0101% general partner interest in the Operating Partnership. In addition, the General Partner owns a 24.4% limited partner interest and a special limited partner interest in the Partnership. The limited partner interest is evidenced by 7,163,750 Subordinated Units and the special limited partner interest is evidenced by Additional Partnership Units ("APUs") (See Note 4 Distributions of Available Cash). The General Partner has delegated to the Partnership's Board of Supervisors all management powers over the business and affairs of the Partnership Entities that the General Partner possesses under applicable law (See Note 14 Subsequent Event). The Partnership Entities are, and the Predecessor Company was, engaged in the retail and wholesale marketing of propane and related appliances and services. The Partnership believes it is the third largest retail marketer of propane in the United States, serving more than 700,000 active residential, commercial, industrial and agricultural customers from more than 340 customer service centers in over 40 states. The Partnership's operations are concentrated in the east and west coast regions of the United States. The retail propane sales volume of the Partnership was approximately 530 million gallons during the fiscal year ended September 26, 1998. Based on industry statistics, the Partnership believes that its retail propane sales volume constitutes approximately 6% of the domestic retail market for propane. 2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION. The consolidated financial statements present the consolidated financial position, results of operations and cash flows of the Partnership Entities and the Predecessor Company. All significant intercompany transactions and accounts have been eliminated. FISCAL PERIOD. The Partnership and the Predecessor Company's fiscal year ends on the last Saturday nearest to September 30. Because the Partnership commenced operations on the Closing Date, the accompanying statements of operations and cash flows present the consolidated results of operations and cash flows of the Partnership for the fiscal years ended F-8 September 26, 1998 and September 27, 1997 and the period March 5, 1996 to September 28, 1996, and the results of operations and cash flows of the Predecessor Company for the period October 1, 1995 to March 4, 1996. Solely for purposes of comparing the results of operations of the Partnership and the Predecessor Company for the years ended September 26, 1998, September 27, 1997 and September 28, 1996, the statement of operations for the year ended September 28, 1996 is comprised of the combined statements of operations of the Predecessor Company for the period October 1, 1995 to March 4, 1996 and the Partnership for the period March 5, 1996 to September 28, 1996. USE OF ESTIMATES. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH EQUIVALENTS. The Partnership considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. The carrying amount approximates fair value because of the short maturity of these instruments. FINANCIAL INSTRUMENTS. The Partnership routinely uses propane futures and forward contracts to reduce the risk of future price fluctuations and to help ensure supply during periods of high demand. Gains and losses on futures and forward contracts designated as hedges are deferred and recognized in cost of sales as a component of the product cost for the related hedged transaction. In order for a future or forward contract to be accounted for as a hedge, the item to be hedged must expose the Partnership to price risk and the future or forward must reduce such price risk. As the Partnership is subject to propane market pricing and the propane forwards and futures highly correlate with changes in the market price of propane, hedge accounting is often utilized. The Partnership accounts for financial instruments which do not meet the hedge criteria or for hedging transactions which are terminated, under the mark or market rules which require gains or losses to be immediately recognized in earnings. In the Consolidated Statement of Cash Flows, cash flows from qualifying hedges are classified in the same category as the cash flows from the items being hedged. Net realized gains and losses for fiscal years 1998 and 1997 and unrealized gains and losses on open positions as of September 26, 1998 and September 27, 1997, respectively, were not material. REVENUE RECOGNITION. Sales of propane are recognized at the time product is shipped or delivered to the customer. Revenue from the sale of propane, appliances and equipment is recognized at the time of sale or installation. Revenue from repairs and maintenance is recognized upon completion of the service. INVENTORIES. Inventories are stated at the lower of cost or market. Cost is determined using a weighted average method for propane and a specific identification basis for appliances. PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are stated at cost. Depreciation is determined for related groups of assets under the straight-line method based upon their estimated useful lives as follows: Buildings 40 Years Building and land improvements 10-20 Years Transportation equipment 5-30 Years Storage facilities 30 Years Equipment, primarily tanks and cylinders 3-40 Years Expenditures for maintenance and routine repairs are expensed as incurred. F-9 GOODWILL AND OTHER INTANGIBLE ASSETS. Goodwill and other intangible assets are comprised of the following: SEPTEMBER 26, SEPTEMBER 27, 1998 1997 ------------- ------------- Goodwill $237,812 $235,439 Debt origination costs 6,224 6,224 Other, principally noncompete agreements 5,076 4,514 ------------- ------------- 249,112 246,177 Less: accumulated amortization 34,330 27,160 ------------- ------------- $214,782 $219,017 ============= ============= Goodwill represents the excess of the purchase price over the fair value of net assets acquired and is being amortized on a straight-line basis over forty years from the date of acquisition. Debt origination costs represent the costs incurred in connection with the placement of the $425,000 of Senior Notes which is being amortized on a straight-line basis over 15 years. The Partnership periodically evaluates goodwill for impairment by calculating the anticipated future cash flows attributable to its operations. Such expected cash flows, on an undiscounted basis, are compared to the carrying values of the tangible and intangible assets, and if impairment is indicated, the carrying value of goodwill is adjusted. In the opinion of management, no impairment of goodwill exists. ACCRUED INSURANCE. Accrued insurance represents the estimated costs of known and anticipated or unasserted claims under the Partnership's 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, the Partnership records a self-insurance provision up to the estimated amount of the probable claim or the amount of the deductible, whichever is lower. Claims are generally settled within 5 years of origination. INCOME TAXES. As discussed in Note 1, the Partnership Entities consist of two limited partnerships, the Partnership and the Operating Partnership, and one corporate entity, the Service Company. For federal and state income tax purposes, the earnings attributable to the Partnership and Operating Partnership are included in the tax returns of the individual partners. As a result, no recognition of income tax expense has been reflected in the Partnership's consolidated financial statements relating to the earnings of the Partnership and Operating Partnership. The earnings attributable to the Service Company are subject to federal and state income taxes. Accordingly, the Partnership's consolidated financial statements reflect income tax expense related to the Service Company's earnings. Net earnings for financial statement purposes may differ significantly from taxable income reportable to Unitholders as a result of differences between the tax basis and financial reporting basis of assets and liabilities and the taxable income allocation requirements under the Partnership Agreement. For federal income tax purposes, the Predecessor Company was included in the consolidated tax return of a United States affiliate of the Parent Company. The Predecessor Company's tax assets, liabilities, expenses and benefits result from the tax effect of its transactions determined as if the Predecessor Company filed a separate income tax return. The Predecessor Company's income taxes were paid by an affiliate of the Parent Company in which income tax expense was credited through an intercompany account. Income taxes are provided based on the provisions of Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes", which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements and tax returns in different years. Under this method, deferred income tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. F-10 UNIT-BASED COMPENSATION. The Partnership accounts for Unit-based compensation in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations, and makes the pro forma information disclosures required under the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation". Upon issuance of Units under the plan, unearned compensation equivalent to the market value of the restricted Units is charged at the date of grant. The unearned compensation is amortized ratably over the restricted periods. The unamortized unearned compensation value is shown as a reduction of partners' capital in the accompanying consolidated balance sheet. NET INCOME (LOSS) PER UNIT. SFAS No. 128, "Earnings per Share" ("Statement No. 128"), issued in February 1997 and effective for financial statements for periods ending after December 15, 1997, establishes and simplifies standards for computing and presenting earnings per share. Statement No. 128 requires restatement of all prior-period earnings per share data presented. Basic net income (loss) per limited partner Unit is computed by dividing net income (loss), after deducting the General Partner's 2% interest, by the weighted average number of outstanding Common Units and Subordinated Units. Diluted net income (loss) per limited partner Unit is computed by dividing net income (loss), after deducting the General Partner's 2% interest, by the weighted average number of outstanding Common Units and Subordinated Units and the weighted average number of Restricted Units granted under the Restricted Unit Award Plan which vest over time (See Note 8 Restricted Unit Plan). NEW ACCOUNTING STANDARDS. In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income" ("Statement No. 130"). Statement No. 130 requires entities to report comprehensive income (the total of net income and all other non-owner changes in partners' capital) either below net income in the statement of operations, in a separate statement of comprehensive income or within the statement of partners' capital. This standard is effective for the Partnership's 1999 fiscal year. Adoption of Statement No. 130 will not have an impact on the financial statements. In January 1998, FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" ("Statement No. 132"). Statement No. 132 standardizes the disclosure requirements for pensions and other postretirement benefits, and requires additional information on changes in benefit obligations and fair values of plan assets. It does not change the measurement or recognition of pensions or other postretirement benefits. This standard is effective for the Partnership's 1999 fiscal year. Management is currently evaluating its impact on the Partnership's financial statements. In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("Statement No. 133"). Statement No. 133 requires entities to record derivatives as assets or liabilities on the balance sheet and to measure them at fair value. This standard is effective for the Partnership's 2000 fiscal year. Management is currently evaluating the impact this statement may have on the Partnership's financial statements. RECLASSIFICATIONS. Certain prior period balances have been reclassified to conform with the current period presentation. 3. SUPPLEMENTAL UNAUDITED PRO FORMA FINANCIAL INFORMATION The following unaudited pro forma supplemental financial information for the year ended September 28, 1996 was derived from the historical statement of operations of the Predecessor Company for the period October 1, 1995 through March 4, 1996 and the consolidated statement of operations of the Partnership from March 5, 1996 through September 28, 1996. The unaudited pro forma supplemental financial information was prepared to reflect the effects of the Partnership formation as if it had been completed in its entirety as of October 1, 1995. However, the financial information does not purport to present the results of operations of the Partnership had the Partnership formation actually been completed as of the beginning of the period presented. In addition, the unaudited pro forma financial information is not necessarily indicative of the results of future operations of the Partnership. F-11 PRO FORMA SEPTEMBER 28, 1996 ------------------ Revenues Propane $641,679 Other 66,267 -------- 707,946 -------- Net income $ 26,885 ======== Net income per Unit $ 0.92 ======== Significant pro forma adjustments reflected in the above data include the following: a. An adjustment to interest expense to reflect the interest expense associated with the Senior Notes and Bank Credit Facilities. b. The elimination of the provision for income taxes, as income taxes will be borne by the partners and not the Partnership, except for corporate income taxes related to the Service Company. c. The Partnership's management estimates that the incremental costs of operating as a stand-alone entity would have approximated the management fee paid to an affiliate of Hanson PLC. These incremental costs are estimated to be $1,290 for the year ended September 28, 1996. 4. DISTRIBUTIONS OF AVAILABLE CASH The Partnership makes distributions to its partners with respect to each fiscal quarter of the Partnership in an aggregate amount equal to its Available Cash for such quarter. Available Cash generally means, with respect to any fiscal quarter of the Partnership, all cash on hand at the end of such quarter less the amount of cash reserves established by the Board of Supervisors in its reasonable discretion for future cash requirements. These reserves are retained for the proper conduct of the Partnership's business, the payment of debt principal and interest and for distributions during the next four quarters. Distributions by the Partnership in an amount equal to 100% of its Available Cash will generally be made 98% to the Common and Subordinated Unitholders and 2% to the General Partner, subject to the payment of incentive distributions in the event Available Cash exceeds the Minimum Quarterly Distribution ($.50) on all Units. To the extent there is sufficient Available Cash, the holders of Common Units have the right to receive the Minimum Quarterly Distribution, plus any arrearages, prior to the distribution of Available Cash to holders of Subordinated Units. Common Units will not accrue arrearages for any quarter after the Subordination Period (as defined below) and Subordinated Units will not accrue any arrearages with respect to distributions for any quarter. The Subordination Period will generally extend until the first day of any quarter beginning after March 31, 2001 in respect of which (a) distributions of Available Cash from Operating Surplus on the Common Units and the Subordinated Units with respect to each of the three consecutive four-quarter periods immediately preceding such date equaled or exceeded the sum of the Minimum Quarterly Distribution on all of the outstanding Common Units and Subordinated Units during such periods, (b) the Adjusted Operating Surplus generated during each of the three consecutive four-quarter periods immediately preceding such date equaled or exceeded the sum of the Minimum Quarterly Distribution on all of the outstanding Common Units and Subordinated Units and related distribution on the General Partner interest in the Partnership during such periods, and (c) there are no outstanding Common Unit Arrearages. Upon expiration of the Subordination Period, all remaining Subordinated Units will convert into Common Units on a one-for-one basis and will thereafter participate pro rata with the other Common Units in distributions of Available Cash. F-12 In accordance with the Distribution Support Agreement among the Partnership, the General Partner and Millennium, to enhance the Partnership's ability to distribute the Minimum Quarterly Distribution on the Common Units, the General Partner has agreed to contribute to the Partnership cash in exchange for APUs. This obligation to purchase APUs remains in effect through March 31, 2001. The General Partner's maximum contribution obligation is $43,600 or 436,000 APUs, and is limited to the number of Common Units issued on the initial public offering date plus Common Units issued in connection with the related underwriters over-allotment option exercised in full (i.e., 21,562,500 Common Units). Issuance of additional Common Units will not cause an increase in the General Partner's maximum contribution obligation. A wholly-owned subsidiary of Millennium has unconditionally guaranteed the General Partner's APU contribution obligation. Millennium is a Securities and Exchange Commission registrant which files periodic reports. Millennium's annual report on Form 10-K for the fiscal year ended December 31, 1997 has been filed (Commission File Number 1-12091). The APUs represent non-voting, limited partner Partnership interests with a stated value per unit of $100. The APUs are not entitled to cash distributions or allocations of any items of Partnership income, gain, loss, deduction or credit. The APUs are subject to quarterly mandatory redemption, in whole or in part, by the Partnership pursuant to the order of priority for distributions from Available Cash. During the Subordination Period, the APUs may only be redeemed after distributions of Available Cash have been made on the Minimum Quarterly Distribution on outstanding Common Units (including any arrearages), the related distribution on the General Partner interest (including any unpaid amounts of prior quarters), and the current quarter's Minimum Quarterly Distribution on outstanding Subordinated Units. After the Subordination Period, the APUs may only be redeemed after distributions of Available Cash have been made on the current quarter's Minimum Quarterly Distribution on outstanding Common Units and the current quarter's related distribution on the General Partner interest. Upon dissolution of the Partnership, to the extent possible, the APUs will be redeemed only after the Common and Subordinated Unitholders and the General Partner have received Unrecovered Capital, as defined by the Partnership Agreement (See Note 14 Subsequent Event). In November 1997, the General Partner contributed $12,000 to the Partnership in exchange for 120,000 APUs. The proceeds were used to enhance the Partnership's ability to distribute the Minimum Quarterly Distribution to Common Unitholders with respect to the fourth fiscal quarter of 1997. The General Partner also contributed $10,000 to the Partnership in exchange for 100,000 APUs for the year ended September 27, 1997, which was also used to enhance the Partnership's ability to distribute the Minimum Quarterly Distribution to Common Unitholders with respect to the third fiscal quarter of 1997. No proceeds were utilized under the Distribution Support Agreement with respect to fiscal year 1998. As of September 26, 1998, $22,000 of cash proceeds remain available under the Distribution Support Agreement. 5. RELATED PARTY TRANSACTIONS The Predecessor Company was provided management, treasury, insurance, employee benefits, tax and accounting services by an affiliate of the former Parent Company. As consideration for the services provided by the affiliate, the Predecessor Company was charged an annual management fee based on a percentage of revenue. In the opinion of management, the management fee allocation represented a reasonable estimate of the cost of services provided by the affiliate on behalf of the Predecessor Company. However, the fee was not necessarily indicative of the level of expenses which might have been incurred by the Predecessor Company operating on a stand-alone basis. Management fees for the period October 1, 1995 to March 4, 1996 were $1,290. The Predecessor Company was provided computerized information services by Quantum under an agreement. Charges related to these services, included in selling, general and administrative expenses in the accompanying statement of operations, were $148 for the period October 1, 1995 to March 4, 1996. F-13 Pursuant to a Computer Services Agreement (the "Services Agreement") dated as of the Closing Date between Millennium Petrochemicals and the Partnership, Millennium Petrochemicals permitted the Partnership to utilize Millennium Petrochemicals' mainframe computer for the generation of customer bills, reports and information regarding the Partnership's retail sales. The Services Agreement was terminated effective April 3, 1998 at which time the Partnership began utilizing the services of an unrelated third party provider. For the years ended September 26, 1998 and September 27, 1997 and the seven months ended September 28, 1996, the Partnership incurred expenses of $202, $384 and $218, respectively, under the Services Agreement. 6. SELECTED BALANCE SHEET INFORMATION Inventories consist of: SEPTEMBER 26, SEPTEMBER 27, 1998 1997 ------------- ------------- Propane $ 25,248 $ 27,753 Appliances 4,714 4,162 --------- --------- $ 29,962 $ 31,915 ========= ========= The Partnership enters into contracts to buy propane for supply purposes. Such contracts generally have terms of less than one year, with propane costs based on market prices at the date of delivery. Property, plant and equipment consist of: SEPTEMBER 26, SEPTEMBER 27, 1998 1997 ------------- ------------- Land and improvements $ 28,425 $ 29,345 Buildings and improvements 47,937 46,785 Transportation equipment 56,126 56,532 Storage facilities 24,386 24,008 Equipment, primarily tanks and cylinders 328,623 323,382 485,497 480,052 Less: accumulated depreciation 141,669 115,705 --------- --------- $ 343,828 $ 364,347 ========= ========= 7. LONG-TERM DEBT AND BANK CREDIT FACILITIES Long-term debt consists of: SEPTEMBER 26, SEPTEMBER 27, 1998 1997 ------------- ------------- Senior Notes, 7.54%, due June 30, 2011 $ 425,000 $ 425,000 Note payable, 8%, due in annual installments through 2006 2,947 3,229 Other long-term liabilities 273 - --------- --------- 428,220 428,229 Less: current portion 323 259 --------- --------- $ 427,897 $ 427,970 ========= ========= On the Closing Date, the Operating Partnership issued $425,000 of Senior Notes with an annual interest rate of 7.54%. The Operating Partnership's obligations under the Senior Note Agreement are unsecured and will rank on an equal and ratable F-14 basis with the Operating Partnership's obligations under the Bank Credit Facilities discussed below. The Senior Notes will mature June 30, 2011, and require semiannual interest payments which commenced June 30, 1996. The Note Agreement requires that the principal be paid in equal annual payments of $42,500 starting June 30, 2002. The Bank Credit Facilities consist of a $75,000 working capital facility and a $25,000 acquisition facility. The Operating Partnership's obligations, under the Bank Credit Facilities are unsecured on an equal and ratable basis with the Operating Partnership's obligations under the Senior Notes. Borrowings under the Bank Credit Facilities bear interest at a rate based upon either LIBOR plus a margin, First Union National Bank's prime rate or the Federal Funds rate plus 1/2 of 1%. An annual fee ranging from .20% to .25% based upon certain financial tests is payable quarterly whether or not borrowings occur. As of September 26, 1998, such fee was .25%. The Bank Credit Facilities expire September 30, 2000. No amounts were outstanding under the Bank Credit Facilities as of September 26, 1998 and September 27, 1997. Based on the current rates offered to the Partnership for debt of the same remaining maturities, the carrying value of the Partnership's long-term debt approximates its fair market value. The Senior Note Agreement and Bank Credit Facilities contain various restrictive and affirmative covenants applicable to the Operating Partnership, including (a) maintenance of certain financial tests, (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. For the years ended September 26, 1998 and September 27, 1997, interest expense was $32,746 and $34,330, respectively. 8. RESTRICTED UNIT PLAN In 1996, the Partnership adopted the 1996 Restricted Unit Award Plan (the "Restricted Unit Plan") which authorizes the issuance of Common Units with an aggregate value of $15,000 (731,707 Common Units valued at the initial public offering price of $20.50 per Unit) to executives, managers and Elected Supervisors of the Partnership. Units issued under the Restricted Unit Plan are subject to a bifurcated vesting procedure such that (a) twenty-five percent of the issued Units will vest over time with one-third of such units vesting at the end of each of the third, fifth and seventh anniversaries of the issuance date, and (b) the remaining seventy-five percent of the Units will vest automatically upon, and in the same proportions as, the conversion of Subordinated Units to Common Units. No Units were vested or exercisable as of September 26, 1998. Restricted Unit Plan participants are not eligible to receive quarterly distributions or vote their respective Units until vested. Restrictions generally limit the sale or transfer of the Units during the restricted periods. The value of the Restricted Unit is established by the market price of the Common Unit at the date of grant. Restricted Units are subject to forfeiture in certain circumstances as defined in the Restricted Unit Plan. Following is a summary of activity in the Restricted Unit Plan: UNITS VALUE PER UNIT ----- -------------- OUTSTANDING, MARCH 5, 1996 - - Awarded 388,533 $20.50 --------- --------------- OUTSTANDING, SEPTEMBER 28, 1996 388,533 $20.50 Awarded 364,634 $18.41 - $21.63 Forfeited (119,019) $20.50 --------- --------------- OUTSTANDING, SEPTEMBER 27, 1997 634,148 $18.41 - $21.63 F-15 Awarded 97,556 $19.91 Forfeited (109,893) $18.41 - $21.63 --------- --------------- OUTSTANDING, SEPTEMBER 26, 1998 621,811 $18.41 - $21.63 ========= =============== For the years ended September 26, 1998 and September 27, 1997 and the seven months ended September 28, 1996, the Partnership amortized $626, $401 and $340 respectively, of unearned compensation. 9. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS DEFINED BENEFIT PLANS Effective January 1, 1998, the Partnership, in connection with its overall restructuring efforts to implement long-term cost reduction strategies, modified certain employee benefit plans. In this regard, the Partnership amended its noncontributory defined benefit pension plan to provide for a cash balance format as compared to a final average format which was in effect prior to January 1, 1998. The cash balance format is designed to evenly spread the growth of a participant's earned retirement benefit throughout his/her career as compared to the final average pay format, under which a greater portion of employee benefits were earned toward the latter stages of one's career. The Partnership also terminated its postretirement benefit plan for all eligible employees retiring after March 1, 1998. All active and eligible employees who were to receive benefits under the postretirement plan subsequent to March 1, 1998, were provided a settlement by increasing their accumulated benefits under the cash balance pension plan. The Partnership has accounted for the restructuring of the above-noted benefit plans as a reduction in the postretirement plan benefit obligation (retaining only the obligation related to employees retired on or before March 1, 1998) and as a corresponding decrease in the net prepaid pension cost with a net difference of $300, after costs associated with such restructuring, being recognized as a gain in the accompanying statement of operations for the year ended September 26, 1998. The Partnership has a noncontributory defined benefit pension plan covering all eligible employees of the Partnership who have met certain requirements as to age and length of service. Contributions are made to a trust maintained by the Partnership. The trust's assets consist primarily of common stock, fixed income securities and real estate. Contributions to the defined benefit plan are made by the Partnership in accordance with the Employee Retirement Income Security Act of 1974 minimum funding standards plus additional amounts which may be determined from time-to-time. The following table sets forth the plan's actuarial assumptions: SEPTEMBER 26, SEPTEMBER 27, 1998 1997 ------------- ------------- Weighted-average discount rate 6.50% 7.25% Average rate of compensation increase 3.50% 4.25% Weighted-average expected long-term rate of return on plan assets 9.0% 9.0% F-16 The following table sets forth the plan's funded status and net prepaid pension cost:
SEPTEMBER 26, 1998 SEPTEMBER 27, 1997 ------------------ ------------------ Actuarial present value of benefit obligation Vested benefit obligation $149,102 $137,872 Non-vested benefit obligation 6,523 6,142 -------- -------- Accumulated benefit obligation $155,625 $144,014 ======== ======== Projected benefit obligation $178,785 $161,700 Plan assets at fair value 179,090 198,594 -------- -------- Plan assets in excess of projected benefit obligation 305 36,894 Unrecognized prior service cost (1,933) (1,067) Unrecognized net loss 36,184 12,771 -------- -------- Net prepaid pension cost $34,556 $ 48,598 ======== ========
The net periodic pension expense/(income) includes the following:
PERIOD PERIOD YEAR ENDED YEAR ENDED MARCH 5, 1996 OCTOBER 1, 1995 TO SEPTEMBER 26, SEPTEMBER 27, TO SEPTEMBER 28, MARCH 4, 1996 1998 1997 1996 (PREDECESSOR) ------------- ------------- --------------- ------------------ Service cost-benefits earned during the period $ 5,038 $ 4,504 $ 2,616 $ 1,869 Interest cost on projected benefit obligation 11,698 10,364 5,748 4,106 Actual return on plan assets (2,760) (41,491) (10,233) (7,310) Net amortization and deferral (14,326) 25,540 310 221 Plan amendment 14,392 - - - ----------- ---------- ---------- ---------- Net periodic pension expense/(income) $ 14,042 $ (1,083) $ (1,559) $ (1,114) =========== ========== ========== ==========
DEFINED CONTRIBUTION PENSION PLAN The Partnership has a defined contribution plan covering most employees. Contributions and costs are a percent of the participating employees' compensation. These amounts totaled $1,923, $1,828, $1,103 and $788 for the years ended September 26, 1998 and September 27, 1997, the seven months ended September 28, 1996 and the five months ended March 4, 1996, respectively. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Partnership provides postretirement health care and life insurance benefits for certain retired employees. Partnership employees hired prior to July 1993 and that retired prior to March 1998 are eligible for such benefits if they reached a specified retirement age while working for the Partnership. F-17 The Partnership does not fund its postretirement benefit plan. The following table presents the plan's accrued postretirement benefit cost included in the accompanying balance sheets at September 26, 1998 and September 27, 1997: SEPTEMBER 26, SEPTEMBER 27, 1998 1997 ------------- ------------- Retirees $ 39,168 $ 40,315 Fully eligible active plan participants 824 7,639 Other active plan participants 1,455 18,797 --------- --------- Accumulated postretirement benefit obligation 41,447 66,751 Unrecognized net loss (8,153) (11,550) Unrecognized prior service cost 5,823 - --------- --------- Accrued postretirement benefit cost 39,117 55,201 Less: current portion 3,137 4,078 --------- --------- Noncurrent liability $ 35,980 $ 51,123 ========= ========= The net periodic postretirement benefit (income)/expense includes the following components:
PERIOD PERIOD YEAR ENDED YEAR ENDED MARCH 5, 1996 OCTOBER 1, 1995 TO SEPTEMBER 26, SEPTEMBER 27, TO SEPTEMBER 28, MARCH 4, 1996 1998 1997 1996 (PREDECESSOR) ------------- ------------- --------------- ------------------ Service cost $ 474 $ 811 $ 473 $ 338 Interest cost 2,645 3,074 918 656 Net amortization and deferral (352) -- -- -- Plan amendment (15,367) -- -- -- -------- -------- -------- -------- Net periodic postretirement benefit (income)/expense $(12,600) $ 3,885 $ 1,391 $ 994 ======== ======== ========= ========
The accumulated postretirement benefit obligation was based on a 9% and 10% increase in the cost of covered health care benefits for 1998 and 1997, respectively. This rate is assumed to decrease gradually to 4.5% in 2003 and to remain at that level thereafter. Increasing the assumed health care cost trend rates by 1.0% in each year would increase the Partnership's accumulated postretirement benefit obligation as of September 26, 1998 by $1,220 and the aggregate of service and interest components of net periodic postretirement benefit cost for the year ended September 26, 1998 by $80. The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 6.5% and 7.5% at September 26, 1998 and September 27, 1997, respectively. 10. RESTRUCTURING CHARGES In fiscal 1997, the Partnership announced that it was evaluating certain long-term cost reduction strategies and organizational changes. As a result of this effort, the Partnership reorganized its product procurement and logistics group, redesigned its fleet maintenance, field support and corporate office organizations, and identified facilities to be closed and impaired assets whose carrying amounts would not be recovered. In support of this effort, the Partnership recorded a restructuring charge of $6,911. F-18 In connection with this restructuring initiative, the Partnership terminated 307 employees and paid termination benefits of $1,591 and $2,500 in fiscal years 1997 and 1998, respectively, which were charged against the restructuring liability. In addition, the Partnership paid $985 in fiscal 1997, primarily related to the closure of excess facilities which was charged against the restructuring liability. The 1997 restructuring includes a charge of $1,835 for impaired assets consisting of $1,235 in information system assets and $600 in excess fleet vehicles. The impaired asset write-offs reflect the remaining book value of certain information system assets as management believed the assets to be technologically obsolete with a minimal fair market value and, in the case of vehicles, the difference between the estimated trade-in value and book value. In fiscal 1996, the Partnership reorganized its corporate office and terminated 53 employees principally related to Corporate Support positions, including the areas of Engineering, Marketing, Executive Management and Technical Training. The Partnership recorded a $2,340 restructuring charge related to this effort and paid associated termination benefits of $1,000 in fiscal 1997 and $285 in fiscal 1998 which were charged against the restructuring liability. In addition, the Partnership paid $710 in fiscal 1997 and $345 in fiscal 1998, principally related to outplacement and legal costs related to the restructuring which were charged against the liability. At September 26, 1998, no accruals related to the restructuring charges remain. 11. PREDECESSOR EQUITY The predecessor equity account reflects the Predecessor Company's activity between an affiliate of the former Parent Company for the period October 1, 1995 to March 4, 1996. An analysis of the predecessor equity is as follows: PERIOD OCTOBER 1, 1995 TO MARCH 4, 1996 ----------------- Beginning balance $558,235 -------- Net income 33,649 -------- Cash transfers, net (26,236) Amounts paid or accrued by parent on behalf of the Predecessor Company, net 52,035 -------- Cash activity with parent, net 25,799 -------- Ending balance $617,683 ======== The predecessor equity account was non-interest bearing with no repayment terms and included $449,749 in intercompany payables at March 4, 1996. 12. INCOME TAXES As discussed in Note 2, the Partnership's earnings for federal and state income tax purposes is included in the tax returns of the individual partners. Accordingly, no recognition has been given to income taxes in the accompanying financial statements of the Partnership except for earnings of the Service Company which are subject to federal and state income taxes. The information presented below relates to the Predecessor Company. F-19 The provision for income taxes consists of the following: PERIOD OCTOBER 1, 1995 TO MARCH 4, 1996 ------------------ Current: Federal $20,516 State 5,809 ------- 26,325 Deferred 1,822 ------- Total provision for income taxes $28,147 ======= A reconciliation of the statutory federal tax rate to the Predecessor Company's effective tax rate follows: PERIOD OCTOBER 1, 1995 TO MARCH 4, 1996 ----------------- Statutory federal tax rate 35.0% Difference in tax rate due to: State income taxes, net of federal income tax benefit 6.0% Goodwill 4.1% Other, net 0.5% ----- Effective tax rate 45.6% ===== 13. COMMITMENTS AND CONTINGENCIES COMMITMENTS The Partnership leases certain property, plant and equipment for various periods under noncancelable leases. Rental expense under operating leases was $16,993, $14,995, $7,844 and $5,603 for the years ended September 26, 1998 and September 27, 1997, the seven months ended September 28, 1996 and the five months ended March 4, 1996, respectively. Future minimum rental commitments under noncancelable operating lease agreements as of September 26, 1998 are as follows: FISCAL YEAR ----------- 1999 $11,659 2000 5,317 2001 4,112 2002 2,459 2003 and thereafter 2,152 CONTINGENCIES As discussed in Note 2, 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 September 26, 1998 and September 27, 1997, accrued insurance liabilities amounted to $21,404 and $23,748, respectively, representing the total estimated losses under these self-insurance programs. These liabilities represent the gross estimated losses as no claims or lawsuits, individually or in the aggregate, were estimated to exceed the Partnership's deductibles and its insurance policies. F-20 The Partnership is also involved in various legal actions which have arisen in the normal course of business, including those relating to commercial transactions and product liability. It is the opinion of management, 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. 14. SALE OF INVESTMENT In December 1997, the Partnership sold its minority interest in the Dixie Pipeline Company, which owns and operates a propane pipeline, for net cash proceeds of $13,090 and realized a gain of $5,090. 15. SUBSEQUENT EVENT On November 27, 1998, the Partnership Entities entered into a Recapitalization Agreement with Millennium, the General Partner and Suburban Energy Services Group LLC, an entity newly formed by the Partnership's management. Under the terms of the Agreement, the Partnership will purchase Millennium's 24.4% subordinated partner interest evidenced by 7,163,750 Subordinated Units and retire such units. In addition, the requirement for the Partnership to repay $22,000 in outstanding APUs under the Distribution Support Agreement will be eliminated. The existing Distribution Support Agreement will be replaced with an alternative support arrangement provided by the Partnership. The aggregate redemption price to be paid to Millennium is $69,000, subject to adjustment, and will be funded from existing cash on hand and, if necessary, borrowings under the Bank Credit Facilities. Concurrent with the execution of the Recapitalization Agreement, Suburban Energy Services Group LLC, ("Successor General Partner") entered into a Purchase Agreement with Millennium and the General Partner whereby the General Partner agreed to sell to the Successor General Partner for $6,000 the General Partner interest in the Partnership Entities. The consummation of the transactions is subject to certain conditions described in the Recapitalization and Purchase Agreements, including the approval of a majority of the Partnership's Common Unitholders. On April , 1999, the Partnership filed a definitive Proxy Statement with the SEC related to the proposed Recapitalization. F-21 INDEX TO SUPPLEMENTAL FINANCIAL STATEMENTS MILLENNIUM AMERICA INC. PAGE ---- Report of Independent Accountants F-23 Consolidated Balance Sheet - December 31, 1998 F-24 Notes to Consolidated Balance Sheet F-25 F-22 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors of Millennium Chemicals Inc. In our opinion, the accompanying consolidated balance sheet presents fairly, in all material respects, the financial position of Millennium America Inc. and its subsidiaries at December 31, 1998 in conformity with generally accepted accounting principles. This financial statement is the responsibility of the Company's management; our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit of this statement in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the balance sheet is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the balance sheet, assessing the accounting principles used and significant estimates made by management, and evaluating the overall balance sheet presentation. We believe that our audit of the balance sheet provides a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Florham Park, NJ January 21, 1999 F-23 MILLENNIUM AMERICA INC. CONSOLIDATED BALANCE SHEET DECEMBER 31, 1998 ------------ (in millions) ASSETS Current assets: Cash and cash equivalents $ 30 Trade receivables, net 136 Inventories 142 Other current assets 230 -------- Total current assets 538 Property, plant and equipment, net 481 Investment in Equistar 1,519 Other assets 167 Due from affiliates 491 Goodwill 412 -------- Total assets $ 3,608 ======== LIABILITIES AND INVESTED CAPITAL Current liabilities: Notes payable $ 9 Current maturities of long-term debt 2 Trade accounts payable 55 Income taxes payable 1 Accrued expenses and other liabilities 144 -------- Total current liabilities 211 Non-current liabilities: Long-term debt 1,013 Deferred income taxes 274 Due to parent 345 Other liabilities 713 -------- Total liabilities 2,556 -------- Commitments and contingencies Invested capital 1,052 -------- Total liabilities and invested capital $ 3,608 ======== F-24 MILLENNIUM AMERICA INC. NOTES TO CONSOLIDATED BALANCE SHEET (DOLLARS IN MILLIONS) NOTE 1-BASIS OF PRESENTATION AND DESCRIPTION OF COMPANY Millennium America, Inc. (the "Company") is a wholly-owned subsidiary of Millennium Chemicals, Inc., ("Millennium Chemicals") a major international chemicals company with leading market positions in a broad range of commodity, industrial, performance and specialty chemicals throughout the world. Millennium Chemicals has been publicly owned since October 1, 1996, when Hanson PLC's ("Hanson's") chemical operations were transferred to it, and in consideration, all of the then outstanding shares of Millennium Chemicals common stock were distributed pro rata to Hanson's shareholders. The Company is the holding company for all of Millennium Chemical's operating subsidiaries and interests other than its operations in the U.K., France, Brazil and Australia. Such operations include Millennium Inorganic Chemicals, Inc., Millennium Petrochemicals Inc., Millennium Specialty Chemicals Inc., and an interest in Equistar Chemicals, LP ("Equistar"), a joint venture formed by the Company, Lyondell Chemical Company ("Lyondell") and Occidental Petroleum Corporation ("Occidental"). See Note 2 for further discussion of the Company's interest in Equistar. Also see the audited financial statements of Equistar at and for the year ended December 31, 1998 set forth in the Millennium Chemicals' Annual Report on Form 10-K for the year ended December 31, 1998, which are incorporated herein by this reference. The Company is also the principal parent for U.S. tax purposes of Millennium's operations and the issuer of publicly traded notes and debentures and the principal borrower under a revolving credit agreement on behalf of Millennium Chemicals. The accompanying financial statements are presented on a consolidated basis. All intercompany transactions and accounts have been eliminated. NOTE 2-ACQUISITIONS AND DISPOSITIONS On December 1, 1997, the Company and Lyondell completed the formation of Equistar, a joint venture partnership created to own and operate the petrochemical and polymer businesses of the Company and Lyondell. The Company contributed to Equistar substantially all of the net assets of its polyethylene, performance polymer and ethyl alcohol businesses. The Company retained $250 from the proceeds of accounts receivable collections and substantially all the accounts payable and accrued expenses of its contributed businesses existing on December 1, 1997, and received proceeds of $750 from borrowings under a new credit facility entered into by Equistar. The Company used the $750, which it received to repay debt. A subsidiary of the Company guarantees $750 of Equistar's credit facility. Equistar was owned 57% by Lyondell and 43% by the Company until May 15, 1998, when the Company and Lyondell expanded Equistar with the addition of the ethylene, propylene, ethylene oxide and derivatives businesses of Occidental's chemical subsidiary. Occidental contributed the net assets of those businesses (including approximately $205 of related debt) to Equistar. In exchange, Equistar borrowed an additional $500, $420 of which was distributed to Occidental and $75 to the Company. Equistar is now owned 41% by Lyondell, 29.5% by Occidental and 29.5% by the Company. No gain or loss resulted from this transaction. Equistar is managed by a Partnership Governance Committee consisting of representatives of each partner. Approval of Equistar's strategic plans and other major decisions requires the consent of the representatives of the three partners. All decisions of Equistar's Governance Committee that do not require unanimity among the partners may be made by Lyondell's representatives alone. The investment in Equistar at the date of contribution represented the carrying value of the Company's contributed net assets, less cash received, and F-25 approximated the fair market value of its interest in Equistar based upon independent valuation. The difference between the carrying value of the Company's investment and its underlying equity in the net assets of Equistar is $404 as a result of adding Occidental as a partner and is being amortized over 25 years. The Company accounts for its interest in Equistar using the equity method. On November 16, 1998, the Company entered into agreements with Linde AG ("Linde") relating to the Company's synthesis gas ("syngas") unit in La Porte, Texas, and a 15% interest in its methanol business, whereby the Company would receive $122.5 in cash. Linde will operate the syngas facility under a long-term lease with a purchase option. In addition, Linde will operate and hold a 15% interest in the methanol facility. As a result, the assets involved in this transaction, including applicable goodwill of $42, have been classified at December 31, 1998 in the accompanying balance sheet in Other current assets. This transaction was subsequently completed on January 18, 1999. No gain or loss resulted from this transaction. In March 1996, the Company sold a 73.6% interest in Suburban Propane, through an initial public offering of 21,562,500 common units in a new master limited partnership, Suburban Propane Partners, L.P., and received aggregate proceeds from the sale of the common units and the issuance of notes of the Suburban Propane operating partnership, Suburban Propane, L.P., (collectively "Suburban Propane") of approximately $831. An indirect subsidiary of the Company, Suburban Propane, G.P., serves as the General Partner of Suburban Propane (the "General Partner"). The Company, through the General Partner, has a combined 2% general partner interest and a 24.4% subordinated limited partner interest in Suburban Propane. The General Partner has agreed, subject to certain limitations, to contribute up to $43.6 million under the Distribution Support Agreement to Suburban Propane in exchange for additional subordinated limited partner interests to enhance Suburban Propane's ability to distribute minimum quarterly cash distributions to its limited partners through March 31, 2001. The Company has fully and unconditionally guaranteed the General Partner's obligation for these contributions and has, to date, contributed $22 million pursuant to this agreement. The General Partner has no independent operations of its own and may not have the financial ability to support its obligations under the Distribution Support Agreement. Accordingly, the audited balance sheet of the Company is presented because the Company is the full and unconditional guarantor of the General Partner's obligations under the Distribution Support Agreement. The General Partner, at December 31, 1998, had assets consisting of its combined investments in Suburban Propane of $26 and invested capital, after intercompany balances, of $26. On November 27, 1998, the Company entered into an agreement to sell its subordinated limited partner interests and interests under the Distribution Support Agreement to Suburban Propane and its management for $75 in cash, with an expected net after-tax gain of approximately $30. The Company's interest in Suburban Propane at December 31, 1998 is included in Other current assets. This transaction is expected to be completed in the second quarter of 1999. NOTE 3-SIGNIFICANT ACCOUNTING POLICIES 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 at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH EQUIVALENTS: Cash equivalents represent investments in short-term deposits and commercial paper with banks which have original maturities of 90 days or less. In addition, investments and other assets include approximately $31 in restricted cash at December 31, 1998 which is on deposit to satisfy insurance claims. INVENTORIES: Inventories are stated at the lower of cost or market value. For certain operations, cost is determined under the last-in, first-out (LIFO) method. The first-in, first-out (FIFO) method, or methods which approximate FIFO, are used by all other subsidiaries. F-26 PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment is stated on the basis of cost. Depreciation is provided by the straight-line method over the estimated useful lives of the assets, generally 20 to 40 years for buildings and 5 to 25 years for machinery and equipment. GOODWILL: Goodwill represents the excess of the purchase price over the fair value of assets allocated to acquired companies. Goodwill is being amortized using the straight-line method over 40 years. Management periodically evaluates goodwill for impairment based on the anticipated future cash flows attributable to its operations. Such expected cash flows, on an undiscounted basis, are compared to the carrying value of the tangible and intangible assets, and if impairment is indicated, the carrying value of goodwill is adjusted. In the opinion of management, no impairment of goodwill exists at December 31, 1998. ENVIRONMENTAL LIABILITIES AND EXPENDITURES: Accruals for environmental matters are recorded in operating expenses when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. Accrued liabilities are exclusive of claims against third parties (except where payment has been received or the amount of liability or contribution by such other parties, has been agreed) and are not discounted. In general, costs related to environmental remediation are charged to expense. Environmental costs are capitalized if the costs increase the value of the property and/or mitigate or prevent contamination from future operations. FEDERAL INCOME TAXES: Deferred tax assets and liabilities are computed based on the difference between the financial statement basis and income tax basis of assets and liabilities using enacted marginal tax rates of the respective tax jurisdictions. The Company has entered into tax-sharing and indemnification agreements with Hanson or its subsidiaries in which the Company and/or its subsidiaries generally agreed to indemnify Hanson or its subsidiaries for income tax liabilities attributable to periods when such other operations were included in the consolidated tax returns of the Company's subsidiaries. NOTE 4-SUPPLEMENTAL BALANCE SHEET INFORMATION 1998 --------------- TRADE RECEIVABLES Trade receivables $ 138 Allowance for doubtful accounts (2) --------------- $ 136 =============== INVENTORIES Finished products $ 49 In-process products 15 Raw materials 56 Other inventories 22 --------------- $ 142 =============== Inventories valued on a LIFO basis were approximately $41 less than the amount of such inventories valued at current cost at December 31, 1998. F-27 1998 --------------- PROPERTY, PLANT AND EQUIPMENT Land and buildings $ 130 Machinery and equipment 765 --------------- 895 Allowance for depreciation and amortization 414 --------------- $ 481 =============== GOODWILL $ 480 Accumulated amortization 68 --------------- $ 412 =============== NOTE 5-INCOME TAXES Significant components of deferred taxes are as follows: 1998 --------------- DEFERRED TAX ASSETS Environmental and legal obligations $ 54 Other post-retirement benefits and pension obligations 47 Net operating loss carryforwards 20 Capital loss carryforwards 136 AMT credits 98 Other accruals 40 --------------- 395 Valuation allowance (136) --------------- Total deferred tax assets 259 --------------- DEFERRED TAX LIABILITIES Excess of book over tax basis in property, plant and equipment 400 Other 143 --------------- Total deferred tax liabilities 543 --------------- Net deferred tax liabilities ($10 classified in other current assets) $ 284 =============== Certain of the income tax returns of the Company's subsidiaries are currently under examination by the Internal Revenue Service and various state tax agencies. In the opinion of management, any assessments which may result will not have a material adverse effect on the financial condition or results of operations of the Company. F-28 NOTE 6-LONG-TERM DEBT AND CREDIT ARRANGEMENTS 1998 --------------- Revolving Credit Facility bearing interest at the bank's prime lending rate, or at LIBOR or NIBOR plus .275% at the option of the Company plus a Facility Fee of .15% to be paid quarterly $ 235 7% Senior Notes due 2006 (net of unamortized discount of $.5 and $.5) 500 7.625% Senior Debentures due 2026 (net of unamortized discount of $.5 and $.5) 249 Debt payable through 2007 at interest rates ranging from 2.4% to 22% 31 Less current maturities of long-term debt (2) --------------- $ 1,013 =============== Under the Revolving Credit Agreement, as amended on October 20, 1997, certain of the Company's subsidiaries may borrow up to $500 under an unsecured multi-currency revolving credit facility, which matures in July 2001 (the "Credit Agreement" or the "Revolving Credit Facility"). Millennium Chemicals is the guarantor of this facility. Borrowings under the Credit Agreement may consist of standby loans or uncommitted competitive loans offered by syndicated banks through an auction bid procedure. Loans may be borrowed in U.S. dollars and/or other currencies. The proceeds from the borrowings may be used to provide working capital and for general corporate purposes. The Credit Agreement contains covenants and provisions that restrict, among other things, the ability of the Company and its material subsidiaries to: (i) create liens on any of its property or assets, or assign any rights to or security interests in future revenues; (ii) engage in sale-and-leaseback transactions; (iii) engage in mergers, consolidations or sales of all or substantially all of their assets on a consolidated basis; (iv) enter into agreements restricting dividends and advances by their subsidiaries; and (v) engage in transactions with affiliates other than those based on arm's-length negotiations. The Credit Agreement also limits the ability of certain subsidiaries of the Company to incur indebtedness or issue preferred stock. In addition, the Credit Agreement requires the Company to satisfy certain financial performance criteria. The Senior Notes and Senior Debentures were issued by the Company and are guaranteed by Millennium Chemicals. The indenture under which the Senior Notes and Senior Debentures were issued contains certain covenants that limit, among other things: (i) the ability of the Company and its Restricted Subsidiaries (as defined) to grant liens or enter into sale-and-leaseback transactions; (ii) the ability of the Restricted Subsidiaries to incur additional indebtedness; and (iii) the ability of the Company and Millennium Chemicals to merge, consolidate or transfer substantially all of their respective assets. At December 31, 1998, the Company had outstanding notes payable of $9 bearing interest at an average rate of approximately 12% with maturity of 30 days or less. At December 31, 1998, the Company had outstanding standby letters of credit amounting to $66 and had unused availability under short-term lines of credit and its Revolving Credit Facility of $412. In addition, the Company has guaranteed certain debt obligations of Equistar up to $750. The maturities of long-term debt during the next five years are as follows: 1999 - $2; 2000 - $17; 2001 - $242; 2002 - $3; and 2003 and beyond - $749. F-29 NOTE 7-FINANCIAL INSTRUMENTS Fair Value of Financial Instruments: The fair value of all short-term financial instruments approximate their carrying value due to their short maturity. The fair value of long-term financial instruments (excluding the Senior Notes and Senior Debentures) approximates carrying value as they were based on terms that continue to be available to the Company from its lenders. The fair value of the Company's other financial instruments at December 31, 1998 are based upon quoted market prices as follows: Carrying Fair Value Value ------------- ------------- Senior Notes and Debentures $ 749 $ 695 NOTE 8-PENSION AND OTHER POSTRETIREMENT BENEFITS The Company has adopted SFAS 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits". SFAS 132 revises the employer's disclosure presentation but does not change the measurement or recognition of these plans. The Company has several noncontributory defined benefit pension and other postretirement benefit plans covering substantially all of its United States employees. The benefits for these plans are based primarily on years of credited service and average compensation as defined under the respective plan provisions. The Company's funding policy is to contribute amounts to the plans sufficient to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974, plus such additional amounts as the Company may determine to be appropriate from time to time. The Company also sponsors defined contribution plans for its salaried and certain union employees. Contributions relating to defined contribution plans are made based upon the respective plan provisions. F-30 The following table provides a reconciliation of the changes in the benefit obligations and the fair value of the plan assets for the year ended December 31, 1998, and a statement of the funded status as of December 31, 1998. Other Pension Postretirement Benefits Benefits 1998 1998 ------------- -------------- Reconciliation of benefit obligation Projected benefit obligation at December 31, 1997 $ 671 $ 127 Service cost, including interest 7 10 Interest in PBO 46 - Participant contributions - 2 Benefit payments (79) (14) Special termination benefits 6 - Curtailments (2) - Net experience loss (gain) 42 2 Amendments 24 - Divestiture - - ------------- -------------- Projected benefit obligation at December 31, 1998 715 127 ------------- -------------- Reconciliation of fair value of plan assets Fair value of plan assets at December 31, 1997 776 - Actual return on plan assets 87 - Employer contributions 2 11 Participant contributions - 2 Benefit payments (75) (13) ------------- -------------- Fair value of plan assets at December 31, 1998 790 - ------------- -------------- Funded status Funded status at December 31, 1998 75 (127) Unrecognized net asset (1) - Unrecognized prior-service cost 23 - Unrecognized loss (gain) 22 (23) Additional minimum liability (8) - ------------- -------------- Prepaid (accrued) interest 111 (150) ------------- -------------- F-31 The assumptions used in the measurement of the Company's benefit obligations are shown in the following table: Other Pension Postretirement Benefits Benefits 1998 1998 -------- -------------- Weighted-average assumptions as of December 31 Discount rate 7.00 % 7.00 % Expected return on plan assets 9.00 % - Rate of compensation increase 4.25 % 4.25 % Net periodic benefit cost Service cost, including interest $ 7 $10 Interest on PBO 46 - Expected return on plan assets (61) - Amortization of unrecognized net loss 2 (2) Amortization of prior-service cost 1 - Deferral - - Special termination benefits 6 - Recognition of prior-service cost 5 - Curtailment loss - - Net periodic benefit cost 6 8 Defined contribution plans 1 - ------- ------ Net periodic benefit cost after curtailment $ 7 $ 8 ======= ====== The assumed health care cost trend rate is 9% at December 31, 1998 and is expected to decrease by 0.5% per year until achieving a rate of 5.5% per year. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A 1% increase or decrease in assumed health care cost trend rates would affect service and interest components of postretirement health care benefit cost by $1 for the year ended December 31, 1998. The effect on the accumulated postretirement benefit obligation would be $8 for the year ended December 31, 1998. The projected benefit obligation, accumulated benefit obligation and the fair value of plan assets for pension plans with accumulated benefit obligations in excess of the plan assets were $42, $40 and $28, respectively, for the year ended December 31, 1998. NOTE 9-RELATED PARTY TRANSACTIONS Due from affiliates principally represents amounts lent to other Millennium Chemical subsidiaries to fund acquisitions made for Millennium Chemicals' titanium dioxide business unit in France and Brazil during 1997 and 1998. Such amounts are evidenced as notes, bearing interest at rates ranging from 5.65% to 8.0%, maturing at various dates (together with accrued interest) through December 31, 2012. Due to parent represents an intercompany payable between the Company and its parent arising from Millennium Chemicals' demerger from Hanson. Such amount is payable on demand. The parent of the Company does not plan to demand payment of this intercompany payable within the next year. F-32 One of the Company's subsidiaries purchases ethylene from Equistar at market-related prices pursuant to an agreement made in connection with the formation of Equistar. Under the agreement the subsidiary is required to purchase 100% of its ethylene requirements for its La Porte, Texas, facility up to a maximum of 330 million pounds per year. The initial term of the contract expires December 1, 2000. Thereafter, the contract automatically renews annually. Either party may terminate on one year's notice. The subsidiary incurred charges of $41 in 1998 under this contract. One of the Company's subsidiaries and Equistar have entered into various operating, manufacturing and technical service agreements. These agreements provide the subsidiary with materials management, certain utilities, administrative office space, health, safety and environmental services. The subsidiary incurred charges of $5 in 1998 for such services. NOTE 10-COMMITMENTS AND CONTINGENCIES The Company is subject, among other things, to several proceedings under the Federal Comprehensive Environmental Response Compensation and Liability Act and other federal and state statutes or agreements with third parties. These proceedings are in various stages ranging from initial investigation to active settlement negotiations to implementation of the clean-up or remediation of sites. Additionally, certain of the Company's subsidiaries are defendants or plaintiffs in lawsuits that have arisen in the normal course of business including those relating to commercial transactions and product liability. While certain of the lawsuits involve allegedly significant amounts, it is management's opinion, based on the advice of counsel, that the ultimate resolution of such litigation will not have a material adverse effect on the Company's financial position or results of operations. The Company believes that the range of potential liability for these matters, collectively, which primarily relate to environmental remediation activities, is between $150 and $174 and has accrued $174 as of December 31, 1998. Equistar has agreed to indemnify and defend the Company and Millennium Chemicals, individually, against certain uninsured claims and liabilities which Equistar may incur relating to the operation of the businesses which the Company contributed to Equistar prior to December 1, 1997 up to an aggregate of $7 million within the first seven years that Equistar operates such businesses. The Company has various contractual obligations to purchase raw materials used in its production of TiO2 and fragrance and flavor chemicals. Commitments to purchase ore used in the production of TiO2 are generally 1-to 8-year contracts with competitive prices generally determined at a fixed amount subject to escalation for inflation. Total commitments to purchase ore for TiO2 aggregate approximately $1,100 and expire between 1999 and 2002. Commitments to acquire crude sulfate turpentine, used in the production of fragrance chemicals, are generally pursuant to 1-to 5- year contracts with prices based on the market price and which expire between 1999 and 2008. F-33 INDEX TO FINANCIAL STATEMENT SCHEDULES SUBURBAN PROPANE PARTNERS, L.P. AND SUBSIDIARIES PAGE ---- Schedule II Valuation and Qualifying Accounts for the years ended September 26, 1998 and September 27, 1997, the period March 5, 1996 through September 28, 1996 and October 1, 1995 through March 4, 1996 S-2 S-1 SCHEDULE II SUBURBAN PROPANE PARTNERS, L.P. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS) BALANCE AT CHARGED DEDUCTIONS BALANCE BEGINNING TO COST / OTHER (AMOUNTS AT END OF PERIOD EXPENSES ADDITIONS CHARGED OFF) OF PERIOD --------- -------- --------- ------------ --------- OCTOBER 1, 1995 TO MARCH 4, 1996 Allowance for doubtful accounts $ 3,162 $ 1,510 $ - $ (1,510) $ 3,162 ======== ======== ==== ========= ======== Accumulated amortization: Goodwill $ 12,559 $ 2,714 $ - $ - $ 15,273 Other intangibles $ 70 $ 69 $ - $ - $ 139 -------- -------- ---- ---- -------- Total $ 12,629 $ 2,783 $ - $ - $ 15,412 ======== ======== ==== ==== ======== MARCH 5, 1996 TO SEPTEMBER 28, 1996 Allowance for doubtful accounts $ 3,162 $ 1,790 $ - $ (1,640) $ 3,312 ======== ======== ==== ========= ======== Accumulated amortization: Goodwill $ 15,273 $ 3,716 $ - $ - $ 18,989 Other intangibles $ 139 $ 443 $ - $ - $ 582 -------- -------- ---- ---- -------- Total $ 15,412 $ 4,159 $ - $ - $ 19,571 ======== ======== ==== ==== ======== Restructuring reserves $ - $ 2,340 $ - $ - $ 2,340 ======== ======== ==== ==== ======== YEAR ENDED SEPTEMBER 27, 1997 Allowance for doubtful accounts $ 3,312 $ 4,569 $ - $ (5,199) $ 2,682 ======== ======== ==== ========= ======== Accumulated amortization: Goodwill $ 18,989 $ 6,644 $ - $ - $ 25,633 Other intangibles $ 582 $ 945 $ - $ - $ 1,527 -------- -------- ---- ---- -------- Total $ 19,571 $ 7,589 $ - $ - $ 27,160 ======== ======== ==== ==== ======== Restructuring reserves $ 2,340 $ 6,911 $ - $ (4,685) $ 4,566 ======== ======== ==== ========= ======== YEAR ENDED SEPTEMBER 26, 1998 Allowance for doubtful accounts $ 2,682 $ 2,642 $ - $ (2,942) $ 2,382 ======== ======== ==== ========= ======== Accumulated amortization: Goodwill $ 25,633 $ 6,134 $ - $ - $ 31,767 Other intangibles $ 1,527 $ 1,036 $ - $ - $ 2,563 -------- -------- ---- ---- -------- Total $ 27,160 $ 7,170 $ - $ - $ 34,330 ======== ======== ==== ==== ======== Restructuring reserves $ 4,566 $ - $ - $ (4,566) $ - ======== ======== ==== ========= ========
S-2 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-10197) of Suburban Propane Partners, L.P. of our reports dated December 8, 1998 and October 21, 1996 appearing on pages F-2 and F-3 of this Annual Report on Form 10-K. We also consent to the application of such reports to the Financial Statement Schedule listed under Item 14(a) 2 of this Form 10-K when such schedule is read in conjunction with the financial statements referred to in our reports. The audits referred to in such reports also included this schedule. PricewaterhouseCoopers LLP Florham Park, NJ April 19, 1999 EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-10197) of Suburban Propane Partners, L.P. of our report dated January 21, 1999 appearing on page F-23 of this Annual Report on Form 10-K. PricewaterhouseCoopers LLP Florham Park, NJ April 21, 1999 -----END PRIVACY-ENHANCED MESSAGE-----