3. Financial Instruments and Risk Management

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

Derivative Instruments and Hedging Activities.

Commodity Price Risk. Given the retail nature of its operations, the Partnership maintains a certain level of priced physical inventory to help ensure its field operations have adequate supply commensurate with the time of year. The Partnership’s strategy is to keep its physical inventory priced relatively close to market for its field operations. The Partnership enters into a combination of exchange-traded futures and option contracts and, in certain instances, over-the-counter options and swap contracts (collectively, “derivative instruments”) to hedge price risk associated with propane and fuel oil physical inventories, as well as future purchases of propane or fuel oil used in its operations and to help ensure adequate supply during periods of high demand. In addition, the Partnership sells propane and fuel oil to customers at fixed prices, and enters into derivative instruments to hedge a portion of its exposure to fluctuations in commodity prices as a result of selling the fixed price contracts. Under this risk management strategy, realized gains or losses on derivative instruments will typically offset losses or gains on the physical inventory once the product is sold or delivered as it pertains to fixed price contracts. All of the Partnership’s derivative instruments are reported on the condensed consolidated balance sheet at their fair values. In addition, in the course of normal operations, the Partnership routinely enters into contracts such as forward priced physical contracts for the purchase or sale of propane and fuel oil that qualify for and are designated as normal purchase or normal sale contracts. Such contracts are exempted from the fair value accounting requirements and are accounted for at the time product is purchased or sold under the related contract. The Partnership does not use derivative instruments for speculative trading purposes. Market risks associated with futures, options, forward and swap contracts are monitored daily for compliance with the Partnership’s Hedging and Risk Management Policy which includes volume limits for open positions. Priced on-hand inventory is also reviewed and managed daily as to exposures to changing market prices.

On the date that derivative instruments are entered into, other than those designated as normal purchases or normal sales, the Partnership makes a determination as to whether the derivative instrument qualifies for designation as a hedge. Changes in the fair value of derivative instruments are recorded each period in current period earnings or other comprehensive income (“OCI”), depending on whether the derivative instrument is designated as a hedge and, if so, the type of hedge. For derivative instruments designated as cash flow hedges, the Partnership formally assesses, both at the hedge contract’s inception and on an ongoing basis, whether the hedge contract is highly effective in offsetting changes in cash flows of hedged items. Changes in the fair value of derivative instruments designated as cash flow hedges are reported in OCI to the extent effective and reclassified into earnings during the same period in which the hedged item affects earnings. The mark-to-market gains or losses on ineffective portions of cash flow hedges are recognized in earnings immediately. Changes in the fair value of derivative instruments that are not designated as cash flow hedges, and that do not meet the normal purchase and normal sale exemption, are recorded within earnings as they occur. Cash flows associated with derivative instruments are reported as operating activities within the condensed consolidated statement of cash flows.

Interest Rate Risk. A portion of the Partnership’s borrowings bear interest at prevailing interest rates based upon, at the Operating Partnership’s option, LIBOR plus an applicable margin or the base rate, defined as the higher of the Federal Funds Rate plus ¹⁄₂ of 1% or the agent bank’s prime rate, or LIBOR plus 1%, plus the applicable margin. The applicable margin is dependent on the level of the Partnership’s total leverage (the ratio of total debt to consolidated income before deducting interest expense, income taxes, depreciation and amortization (“EBITDA”)). Therefore, the Partnership is subject to interest rate risk on the variable component of the interest rate. The Partnership manages part of its variable interest rate risk by entering into interest rate swap agreements. The interest rate swaps have been designated as, and are accounted for as, cash flow hedges. The fair value of the interest rate swaps are determined using an income approach, whereby future settlements under the swaps are converted into a single present value, with fair value being based on the value of current market expectations about those future amounts. Changes in the fair value are recognized in OCI until the hedged item is recognized in earnings. However, due to changes in the underlying interest rate environment, the corresponding value in OCI is subject to change prior to its impact on earnings.

Valuation of Derivative Instruments. The Partnership measures the fair value of its exchange-traded commodity-related options and futures contracts using quoted market prices found on the New York Mercantile Exchange (the “NYMEX”) (Level 1 inputs); the fair value of its swap contracts using quoted forward prices and the fair value of its interest rate swaps using model-derived valuations driven by observable projected movements of the 3-month LIBOR (Level 2 inputs); and the fair value of its over-the-counter options contracts using Level 3 inputs. The Partnership’s over-the-counter commodity-related options contracts are valued based on an internal option model. The inputs utilized in the model are based on publicly available information as well as broker quotes. The significant unobservable inputs used in the fair value measurements of the Partnership’s over-the-counter options contracts are interest rate and market volatility.

The following summarizes the gross fair value of the Partnership’s derivative instruments and their location in the condensed consolidated balance sheet as of June 28, 2014 and September 28, 2013, respectively:


	As of June 28, 2014			As of September 28, 2013
	Location	Fair Value		Location	Fair Value
Asset Derivatives
Derivatives not designated as hedging instruments:
Commodity-related derivatives	Other current assets	$	2,628	Other current assets	$	2,546
	Other assets		104	Other assets		716

		$	2,732		$	3,262


	Location	Fair Value		Location	Fair Value
Liability Derivatives
Derivatives designated as hedging instruments:
Interest rate swap	Other current liabilities	$	1,335	Other current liabilities	$	1,307
	Other liabilities		733	Other liabilities		1,121

		$	2,068		$	2,428

Derivatives not designated as hedging instruments:
Commodity-related derivatives	Other current liabilities	$	434	Other current liabilities	$	430

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


	Fair Value Measurement Using Significant Unobservable Inputs (Level 3)
	Nine Months Ended					Nine Months Ended
	June 28, 2014					June 29, 2013
	Assets			Liabilities		Assets			Liabilities
Beginning balance of over-the-counter options	$	1,847		$	—	$	5,002		$	1,209
Beginning balance realized during the period		(773	)		—		(3,933	)		(1,162	)
Contracts purchased during the period		1,141			—		984			—
Change in the fair value of outstanding contracts		(85	)		—		(544	)		(43	)

Ending balance of over-the-counter options	$	2,130		$	—	$	1,509		$	4

As of June 28, 2014 and September 28, 2013, the Partnership’s outstanding commodity-related derivatives had a weighted average maturity of approximately six and four months, respectively.

The effect of the Partnership’s derivative instruments on the condensed consolidated statement of operations and the condensed consolidated statement of comprehensive income, as applicable, for the three and nine months ended June 28, 2014 and June 29, 2013 are as follows:

Three months ended June 28, 2014

Three months ended June 29, 2013

Derivatives in Cash Flow
Hedging Relationships

Gains (Losses)
Recognized in OCI
(Effective Portion)

Gains (Losses) Reclassified

from Accumulated OCI into

Income

Gains (Losses)
Recognized in OCI
(Effective Portion)

Gains (Losses) Reclassified

from Accumulated OCI into

Income

Location

Amount

Location

Amount

Interest rate swap

(433

)

Interest expense

(351

)

857

Interest expense

(702

)

Derivatives Not Designated as
Hedging Instruments

Unrealized Gains (Losses)

Recognized in Income

Unrealized Gains (Losses)

Recognized in Income

Location

Amount

Location

Amount

Commodity-related derivatives

Cost of products sold

707

Cost of products sold

(73

)

Nine months ended June 28, 2014

Nine months ended June 29, 2013

Derivatives in Cash Flow
Hedging Relationships

Gains (Losses)
Recognized in OCI
(Effective Portion)

Gains (Losses) Reclassified

from Accumulated OCI into

Income

Gains (Losses)
Recognized in OCI
(Effective Portion)

Gains (Losses) Reclassified

from Accumulated OCI into

Income

Location

Amount

Location

Amount

Interest rate swap

(689

)

Interest expense

(1,050

)

1,176

Interest expense

(2,100

)

Derivatives Not Designated as
Hedging Instruments

Unrealized Gains (Losses)

Recognized in Income

Unrealized Gains (Losses)

Recognized in Income

Location

Amount

Location

Amount

Commodity-related derivatives

Cost of products sold

708

Cost of products sold

(6,333

)

The following table presents the fair value of the Partnership’s recognized derivative assets and liabilities on a gross basis and amounts offset on the condensed consolidated balance sheets subject to enforceable master netting arrangements or similar agreements:


	As of June 28, 2014
	Gross amounts		Effects of netting			Net amounts presented in the balance sheet
Asset Derivatives
Commodity-related derivatives	$	4,086	$	(1,354	)	$	2,732
Interest rate swap		1,994		(1,994	)		—

	$	6,080	$	(3,348	)	$	2,732

Liability Derivatives
Commodity-related derivatives	$	1,788	$	(1,354	)	$	434
Interest rate swap		4,062		(1,994	)		2,068

	$	5,850	$	(3,348	)	$	2,502


	As of September 28, 2013
	Gross amounts		Effects of netting			Net amounts presented in the balance sheet
Asset Derivatives
Commodity-related derivatives	$	3,634	$	(372	)	$	3,262
Interest rate swap		2,804		(2,804	)		—

	$	6,438	$	(3,176	)	$	3,262

Liability Derivatives
Commodity-related derivatives	$	802	$	(372	)	$	430
Interest rate swap		5,232		(2,804	)		2,428

	$	6,034	$	(3,176	)	$	2,858

The Partnership posted cash collateral of $958 and $-0- as of June 28, 2014 and September 28, 2013, respectively, with its brokers for outstanding commodity-related derivatives.

Bank Debt and Senior Notes. The fair value of the borrowings under the Revolving Credit Facility (defined below) approximates the carrying value since the interest rates are periodically adjusted to reflect market conditions. Based upon quoted market prices (a Level 1 input), the fair value of the Senior Notes (defined below) of the Partnership are as follows:


	As of
	June 28,		September 28,
	2014		2013
7.5% senior notes due October 1, 2018	$	—	$	533,799
7.375% senior notes due March 15, 2020		264,250		268,125
7.375% senior notes due August 1, 2021		378,565		372,143
5.50% senior notes due June 1, 2024		532,628		—

	$	1,175,443	$	1,174,067