<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number: 33-98490
--------
STAR GAS PARTNERS, L.P.
----------------------
(Exact name of registrant as specified in its charter)
Delaware 06-1437793
- ------------- -------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2187 Atlantic Street, Stamford, Connecticut 06902
- -------------------------------------------------------------------------------
(Address of principal executive office) (Zip Code)
(203) 328-7300
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
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 such 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of May 13, 1997:
Star Gas Partners, L.P. 2,875,000 Common Units
2,396,078 Subordinated Units
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARY
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Part I Financial Information:
Item 1 - Financial Statements
Star Gas Partners, L.P. and the Star Gas Group (Predecessor)
------------------------------------------------------------
Consolidated Balance Sheets as of September 30, 1996
and March 31, 1997 3
Consolidated Statements of Operations for the three
months ended March 31, 1996 and for the three months
ended March 31, 1997 4
Consolidated Statements of Operations from October 1, 1995
through December 20, 1995 (Predecessor), from December 20, 1995
through March 31, 1996 and for the six months ended March 31, 1997 5
Consolidated Statements of Cash Flows from October 1, 1995
through December 20, 1995 (Predecessor), from December 20, 1995
through March 31, 1996 and for the six months ended March 31, 1997 6
Consolidated Statement of Partners' Capital for the six months
ended March 31, 1997 7
Notes to Consolidated Financial Statements 8 - 10
Item 2 - Management's Discussion and Analysis of Financial Conditions
and Results of Operations 11 - 14
Part II Other Information:
Item 6 - Exhibits and Reports on Form 8-K 15
Signature 16
</TABLE>
2
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
March 31,
September 30, 1997
1996 (unaudited)
-------------- ------------
Assets
<S> <C> <C>
Current assets:
Cash $ 1,106 $ 4,319
Receivables, net of allowance of $291 and
$378, respectively 7,226 11,984
Inventories 8,494 3,552
Prepaid expenses and other current assets 1,016 1,467
-------- --------
Total current assets 17,842 21,322
-------- --------
Property and equipment, net 97,733 97,740
Intangibles and other assets, net 41,338 39,616
-------- --------
Total assets $156,913 $158,678
======== ========
Liabilities and Partners' Capital
Current liabilities:
Bank credit facility borrowings $ 2,350 $ -
Accounts payable 1,991 2,678
Accrued interest 285 307
Other accrued expenses 2,812 3,180
Customer credit balances 2,858 574
-------- --------
Total current liabilities 10,296 6,739
-------- --------
Long-term debt 85,000 85,000
Other long-term liabilities 219 240
Partners' Capital:
Common unitholders 52,821 55,655
Subordinated unitholder 8,410 10,771
General partner 167 273
-------- --------
Total Partners' Capital 61,398 66,699
-------- --------
Total Liabilities and Partners' Capital $156,913 $158,678
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per unit amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------
March 31, March 31,
1996 1997
-------- --------
<S> <C> <C>
Sales $ 47,080 $ 46,442
Cost of sales 24,481 24,919
-------- --------
Gross profit 22,599 21,523
Delivery and branch 9,682 9,504
Depreciation and amortization 2,473 2,630
General and administrative 1,455 2,294
Net gain (loss) on sales of assets (23) 8
-------- --------
Operating income 8,966 7,103
Interest expense net 1,722 1,771
-------- --------
Income before income taxes 7,244 5,332
Income tax expense 14 7
-------- --------
Net income $ 7,230 $ 5,325
======== ========
General Partner's interest
in net income $ 145 $ 107
-------- --------
Limited Partners' interest
in net income $ 7,085 $ 5,218
======== ========
Net income per Limited Partner unit
$ 1.34 $ 0.99
======== ========
Weighted average number of Limited Partner
units outstanding 5,271 5,271
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per unit amounts)
(unaudited)
<TABLE>
<CAPTION>
October 1,
1995 December 20, Six Months Ended
through 1995 --------------------------
December 20, through March 31,
1995 March 31, 1996 March 31,
(Predecessor) 1996 (combined) 1997
------------- ------------ ---------- -------
<S> <C> <C> <C> <C>
Sales $ 28,159 $ 53,555 $ 81,714 $ 97,318
Cost of sales 12,808 27,578 40,386 53,946
-------- -------- -------- --------
Gross profit 15,351 25,977 41,328 43,372
Delivery and branch 7,729 10,991 18,720 19,352
Depreciation and amortization 2,177 2,739 4,916 5,216
General and administrative 1,349 1,540 2,889 3,893
Net loss on sales of assets (113) (23) (136) (62)
-------- -------- -------- --------
Operating income 3,983 10,684 14,667 14,849
Interest expense, net 1,922 1,955 3,877 3,619
-------- -------- -------- --------
Income before income taxes 2,061 8,729 10,790 11,230
Income tax expense 60 14 74 13
-------- -------- -------- --------
Net income $ 2,001 $ 8,715 $ 10,716 $ 11,217
======== ======== ======== ========
General Partner's interest in
net income $ 175 $ 225
-------- --------
Limited Partners' interest in
net income $ 8,540 $ 10,992
======== ========
Net income per Limited Partner
unit $ 1.62 $ 2.09
======== ========
Weighted average number of
Limited Partner units 5,271 5,271
outstanding ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
October 1, 1995 October 1, 1995
through December 20, 1995 through Six Months
December 20, 1995 through March 31, 1996 Ended
(Predecessor) March 31, 1996 (combined) March 31, 1997
---------------- --------------- ------------ --------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,001 $ 8,715 $ 10,716 $11,217
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 2,177 2,739 4,916 5,216
Provision for losses on
accounts receivable 101 132 233 204
Loss on sales of assets 113 23 136 62
Changes in operating assets
and liabilities:
Increase in receivables (2,779) (3,636) (6,415) (4,961)
Decrease in inventories 1,430 1,763 3,193 4,942
Increase in other assets (455) (134) (589) (309)
Increase (decrease) in accounts
payable 10 (246) (236) 687
Decrease in other current liabilities (1,713) (488) (2,201) (1,894)
Increase (decrease) in other
long-term liabilities (12) (24) (36) 21
-------- -------- -------- -------
Net cash provided by
operating activities 873 8,844 9,717 15,185
-------- -------- -------- -------
Cash flows from investing activities:
Capital expenditures (1,617) (1,237) (2,854) (3,788)
Purchase of Company - (1,500) (1,500) -
Proceeds from sales of fixed assets 566 65 631 176
-------- -------- -------- -------
Net cash used in investing
activities (1,051) (2,672) (3,723) (3,612)
-------- -------- -------- -------
Cash flows from financing activities:
Credit facility borrowings - - - 5,000
Credit facility repayments - - - (7,350)
Acquisition facility borrowings - - - 3,350
Acquisition facility repayments - - - (3,350)
Repayments of debt (35,783) (53,780) (89,563) -
Cash dividends paid (21,309) - (21,309) -
Distributions - - - (5,916)
Loan to Petro (12,000) - (12,000) -
Proceeds from issuance of First
Mortgage Notes 85,000 - 85,000 -
Proceeds from issuance of
Common Units, net - 55,931 55,931 -
Repayment of preferred stock to Petro (8,625) - (8,625) -
Increase in deferred charges (1,313) (526) (1,839) (94)
Cash retained by general partner (6,000) - (6,000) -
-------- -------- -------- ------
Net cash provided by (used in)
financing activities (30) 1,625 1,595 (8,360)
-------- -------- -------- -------
Net increase (decrease) in cash (208) 7,797 7,589 3,213
Cash at beginning of period 727 519 727 1,106
-------- -------- -------- -------
Cash at end of period $ 519 $ 8,316 $ 8,316 $ 4,319
======== ======== ======== =======
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Income taxes $ 78 $ 2 $ 80 $ 7
======== ======== ======== =======
Interest $ 19 $ 1,652 $ 1,671 $ 3,417
======== ======== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
SIX MONTHS ENDED MARCH 31, 1997
(in thousands, except per unit data)
(unaudited)
<TABLE>
<CAPTION>
Number of units Total
---------------------- General Partners'
Common Subordinated Common Subordinated Partner Capital
---------------------- ------ ------------ ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance September 30, 1996 2,875 2,396 $52,821 $ 8,410 $167 $61,398
Minimum Quarterly Distribution
($1.10 per unit) (3,162) (2,636) (118) (5,916)
Net income - - 5,996 4,997 224 11,217
----- ----- ------- ------- ---- -------
Balance March 31, 1997 2,875 2,396 $55,655 $10,771 $273 $66,699
===== ===== ======= ======= ==== =======
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
1) Partnership Organization and Formation
Star Gas Partners, L.P. ("Star Gas Partners" or the "Partnership")
was formed on October 16, 1995, as a Delaware limited partnership. Star
Gas Partners and its subsidiary, Star Gas Propane, L.P., a Delaware
limited partnership, (the "Operating Partnership") were formed to acquire,
own and operate substantially all of the propane operations and assets and
liabilities of Star Gas Corporation ("Star Gas"), a Delaware corporation
(and the general partner of Star Gas Partners and the Operating
Partnership) and the propane operations and assets and liabilities of Star
Gas' parent corporation, Petroleum Heat and Power Co., Inc., a Minnesota
corporation ("Petro"), (collectively hereinafter referred to as the "Star
Gas Group" or the "Predecessor Company"). The Operating Partnership is,
and the Star Gas Group was, engaged in the marketing and distribution of
propane gas and related appliances to retail and wholesale customers in
the United States located principally in the Midwest and Northeast. On
December 20, 1995, (i) Petro conveyed all of its propane assets and
related liabilities to Star Gas and (ii) Star Gas and its subsidiaries
conveyed substantially all of their assets (other than $83.7 million in
cash from the proceeds of the First Mortgage Notes and certain non-
operating assets) to the Operating Partnership (the "Star Gas Conveyance")
in exchange for general and limited partner interests in the Operating
Partnership and the assumption by the Operating Partnership of
substantially all of the liabilities of Star Gas and its subsidiaries
(excluding certain income tax liabilities and certain other long-term
obligations of Star Gas that were assumed by Petro), including the First
Mortgage Notes and approximately $53.8 million in outstanding Star Gas
debt due to Petro. The net book value of the assets contributed by Star
Gas and its subsidiaries to the Operating Partnership exceeded liabilities
assumed by $11.2 million. Immediately after the Star Gas Conveyance, Star
Gas and its subsidiaries conveyed their limited partner interests in the
Operating Partnership to Star Gas Partners in exchange for an aggregate of
2.4 million Subordinated Units of limited partner interests in Star Gas
Partners.
Of the $83.7 million in cash retained by the General Partner, $35.8
was paid to Petro in satisfaction of additional indebtedness, $8.6 million
was used to redeem preferred stock of the General Partner held by Petro,
$12.0 million was loaned to Petro, and $6.0 million was retained to be
available to fund the General Partner's additional capital contribution
obligation. The remaining $21.3 million was paid to Petro as dividends.
On December 20, 1995, Star Gas Partners completed its initial public
offering of 2.6 million Common Units, representing Limited Partner
interests, at a price of $22.00 a unit. The net proceeds received of $51.0
million, after deducting underwriting discounts, commissions and expenses
were contributed to the Operating Partnership and used to repay debt due
to Petro, which was assumed by the Operating Partnership in the Star Gas
Conveyance.
In January 1996, pursuant to the underwriters' over-allotment, an
additional 0.3 million Common Units were issued for approximately $5.6
million, net of underwriting discounts and expenses.
The General Partner holds a 1.0% general partner interest in Star Gas
Partners and a 1.0101% general partner interest in the Operating
Partnership. Star Gas Partners and the Operating Partnership have no
employees, except for certain employees of its corporate subsidiary
Stellar Propane Service Corporation. The General Partner conducts, directs
and manages all activities of Star Gas Partners and the Operating
Partnership and is reimbursed on a monthly basis for all direct and
indirect expenses it incurs on their behalf including the cost of employee
wages.
8
<PAGE>
2) Basis of Presentation
The unaudited consolidated financial statements reflect all
adjustments which are, in the opinion of management, necessary for a
fair statement of the interim periods presented. All adjustments to
the financial statements were of a normal recurring nature.
The propane industry is seasonal in nature because propane is
used primarily for heating in residential and commercial buildings.
Therefore, the results of operations for the periods ended March 31,
1996 and March 31, 1997 are not necessarily indicative of the results
to be expected for a full year.
Inventories
Inventories are stated at the lower of cost or market and are
computed on a first-in, first-out basis. At the dates indicated the
components of inventory were as follows:
<TABLE>
<CAPTION>
September 30, March 31,
1996 1997
------------- ---------
<S> <C> <C>
Propane gas $6,625 $1,571
Appliances and equipment 1,869 1,981
------ ------
$8,494 $3,552
====== ======
</TABLE>
3) Net Income per Limited Partner Unit
Net income per Limited Partner Unit is computed by dividing net
income, after deducting the General Partner's 2.0% interest, by the
weighted average number of Common Units and Subordinated Units
outstanding.
4) Commitments and Contingencies
In the ordinary course of business, the Partnership is
threatened with, or is named in, various lawsuits. The Partnership is
not a party to any litigation which individually or in the aggregate
could reasonably be expected to have a material adverse effect on the
company.
5) Related Party Transactions
The Partnership has no employees except for certain employees of
its corporate subsidiary, Stellar Propane Service Corporation and is
managed and controlled by the General Partner. Pursuant to the
Partnership Agreement, the General Partner is entitled to
reimbursement for all direct and indirect expenses incurred or
payments it makes on behalf of the Partnership, and all other
necessary or appropriate expenses allocable to the Partnership or
otherwise reasonably incurred by the General Partner in connection
with operating the Partnership's business. For the six months ended
March 31, 1997, the Partnership reimbursed the General Partner and
Petro $9.1 million representing salary, payroll tax and other
compensation paid to the employees of the General Partner, including
$0.1 million paid to Petro for certain corporate functions such as
finance and compliance.
6) Retention of Morgan Stanley & Co. Incorporated
On March 3, 1997, the Partnership announced that it has
concluded its review of strategic alternatives. Based on the results
of this study, the Partnership's financial performance and industry
prospects, the Partnership has decided to pursue the opportunities it
sees to grow the business rather than seek a sale at this time.
7) Subsequent Events
On April 11, 1997, the Partnership announced that it will pay a
cash distribution of $0.55 per Limited Partner Unit for the three
months ended March 31, 1997. The distribution is payable on May 15,
1997 to unitholders of record as of May 1, 1997.
9
<PAGE>
8) General Partner Financial Statements
The following presents the Condensed Consolidated Balance Sheet
as of March 31, 1997 together with the Condensed Consolidated
Statement of Operations of the General Partner, Star Gas Corporation
and Subsidiary, for the six months ended March 31, 1997.
Star Gas Corporation
and Subsidiary
Condensed Consolidated Balance Sheet
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
March 31,
1997
---------
<S> <C>
Assets
Current assets:
Cash $ 3,055
Interest receivable 13
-------
Total current assets 3,068
Note receivable from Petro 12,000
Investment in Partnership 11,044
-------
Total assets $26,112
=======
Liabilities and Shareholder's Equity
Current liabilities:
Accrued expenses $ 33
-------
Shareholder's equity 26,079
-------
Total liabilities and shareholder's equity $26,112
=======
</TABLE>
Star Gas Corporation
and Subsidiary
Condensed Consolidated Statement of Operations
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
March 31,
1997
----------------
<S> <C>
Revenues:
Reimbursement of employee expenses from Operating Partnership $ 8,996
Expenses:
Cost of employee services provided to Operating Partnership 8,996
-------
Operating income -
Interest income 748
-------
Income before equity interest in Partnership 748
Share of income of Partnership 5,221
-------
Net income $ 5,969
=======
</TABLE>
10
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1997
- -------------------------------
COMPARED TO SIX MONTHS ENDED MARCH 31, 1996
- -------------------------------------------
Overview
The following discussion reflects the results of operations and operating data
of Star Gas Partners, L.P. for the six months ended March 31, 1997 and is
compared to the combined results of the Star Gas Group, the Predecessor Company,
from October 1, 1995 to December 20, 1995 and Star Gas Partners, L.P. from
December 20, 1995 to March 31, 1996. The operating results of the Star Gas Group
and Star Gas Partners, L.P. were combined for the six months ended March 31,
1996 to facilitate an analysis of the fundamental operating data.
In analyzing the historical financial results of the Star Gas Group and the
financial results of the Partnership, the following matters should be
considered:
Propane's primary use is for residential and commercial heating. As a result,
weather conditions have a significant impact on financial performance.
Accordingly, in analyzing changes in financial performance, the weather
conditions in which the Partnership/Star Gas Group operated in any given period
should be considered.
In addition, gross profit margins vary according to the customer mix. For
example, sales to residential customers generate higher gross profit margins
than sales to other customer groups, such as agricultural customers.
Accordingly, a change in customer mix can affect gross profit without
necessarily impacting total sales.
Lastly, the propane industry is seasonal in nature with peak activity occurring
during the winter months, during the Partnership's first and second fiscal
quarter. Due to the seasonality of the business, results of operations for the
periods presented are not necessarily indicative of the results to be expected
for a full year.
Volume
For the six months ended March 31, 1997, retail propane volume declined 1.7
million gallons, or 2.4%, to 67.3 million gallons, as compared to 69.0 million
gallons for the six months ended March 31, 1996. The decline was primarily
attributable to the effect on volume of 10% warmer temperatures and to a lesser
extent, customer conservation efforts attributable to significantly higher
propane selling prices. The Partnership was able to mitigate the effects of the
warmer temperatures on retail propane volume through both internal account
growth and two acquisitions completed since March 15, 1996. Also favorably
impacting the year-to-year comparison was an increase in sales to agricultural
customers, resulting from a return to more normal grain drying demand.
Sales
For the six months ended March 31, 1997, sales increased $15.6 million, or
19.1%, to $97.3 million, as compared to $81.7 million for the six months ended
March 31, 1996. The increase was primarily due to higher selling prices in
response to a significant increase in propane supply costs experienced during
the six months ended March 31, 1997.
Cost of Sales
For the six months ended March 31, 1997, cost of sales increased $13.6 million,
or 33.6%, to $53.9 million, as compared to $40.4 million for the six months
ended March 31, 1996. The increase was primarily due to higher per gallon
propane supply costs.
11
<PAGE>
Gross Profit
For the six months ended March 31, 1997, gross profit increased $2.0 million, or
4.9%, to $43.4 million, as compared to $41.3 million for the six months ended
March 31, 1996. The increase in gross profit resulted from higher per gallon
margins across all market segments which was partially offset by the impact of
slightly lower retail propane volume.
Delivery and Branch Expenses
For the six months ended March 31, 1997, delivery and branch expenses increased
$0.6 million, or 3.3%, to $19.4 million, as compared to $18.7 million for the
six months ended March 31, 1996. The increase was primarily due to the
additional expenses associated with the first fiscal quarter's increase in
agricultural volume and higher vehicle operating costs due to an increase in
fuel costs.
Depreciation and Amortization
For the six months ended March 31, 1997, depreciation and amortization expense
increased $0.3 million, or 6.1%, to $5.2 million, as compared to $4.9 million
for the six months ended March 31, 1996, due to the impact of two acquisitions
completed subsequent to March 15, 1996 and the amortization of certain deferred
charges relating to the Partnership's First Mortgage Notes.
General and Administrative Expenses
For the six months ended March 31, 1997, general and administrative expenses
increased $1.0 million, or 34.8%, to $3.9 million, as compared to $2.9 million
for the six months ended March 31, 1996. This increase was primarily due to $0.9
million of one-time expenses associated with exploring strategic alternatives to
maximize unitholder value. On March 3, 1997, the Partnership decided to
terminate its efforts to seek a merger or possible sale of the Partnership at
this time.
Net Interest Expense
For the six months ended March 31, 1997, interest expense declined $0.3 million,
or 6.7%, to $3.6 million, as compared to $3.9 million for the six months ended
March 31, 1996. This reduction was primarily due to a decline in the weighted
average borrowing rate.
Income Tax Expense
Income tax expense primarily represents certain state income taxes related to
the Partnership's wholly owned corporation which conducts non-qualifying master
limited Partnership business.
Net Income
For the six months ended March 31, 1997, net income increased $0.5 million, or
4.7%, to $11.2 million. This increase was attributable to a $2.0 million
increase in gross profit that was partially offset by the operating costs
associated with the additional agricultural volume and $0.9 million of one-time
costs associated with the strategic initiative.
EBITDA
For the six months ended March 31, 1997, EBITDA (defined as operating income
plus depreciation and amortization less net gain (loss) on sales of assets)
increased $0.4 million, or 2.1%, to $20.1 million, as compared to $19.7 million
for the six months ended March 31, 1996. Excluding the one-time expenses
associated with the strategic initiative, EBITDA increased $1.3 million, or
6.8%, to $21.1 million due to improved per gallon margins across all market
segments and growth in the customer base provided by both internal marketing and
acquisition efforts. 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) but
provides additional information for evaluating the Partnership's ability to make
the Minimum Quarterly Distribution.
12
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997
- ---------------------------------
COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
- ---------------------------------------------
Volume
For the three months ended March 31, 1997, retail propane volume declined 5.2
million gallons, or 13.7%, to 32.9 million gallons, as compared to 38.2 million
for the three months ended March 31, 1996. The decline was primarily due to
temperatures that were 11.2% warmer than the previous year's comparable period
and to a lesser extent, customer conservation efforts attributable to
significantly higher propane selling prices.
Sales
For the three months ended March 31, 1997, sales declined $0.6 million, or 1.4%,
to $46.4 million, as compared to $47.1 million for the three months ended March
31, 1996. The modest decrease was due to the temperature related volume decline
which was partially offset by higher selling prices, driven by increased
wholesale product costs.
Cost of Sales
For the three months ended March 31, 1997, cost of sales increased $0.4 million,
or 1.8%, to $24.9 million, as compared to the $24.5 million realized for the
three months ended March 31, 1996. Cost of sales was virtually unchanged from
the prior period as the impact of higher wholesale supply costs was offset by
the lower level of retail and wholesale propane volumes.
Gross Profit
For the three months ended March 31, 1997, gross profit declined $1.1 million,
or 4.8%, to $21.5 million, as compared to $22.6 million for the three months
ended March 31, 1996. This decrease in gross profit was less than the 13.7%
decline in retail propane volume as the impact of higher retail per gallon
margins across all market segments partially offset the decrease in gross profit
attributable to the lower level of volume.
Delivery and Branch Expenses
For the three months ended March 31, 1997, delivery and branch expenses were
reduced by $0.2 million, or 1.8%, to $9.5 million, as compared to $9.7 million
for the three months ended March 31, 1996. Despite the effects of inflation on
operating expenses, the Partnership was able to reduce these costs in response
to the volume change.
Depreciation and Amortization Expense
For the three months ended March 31, 1997, depreciation and amortization expense
increased $0.2 million, or 6.3%, to $2.6 million, due to the impact of
acquisitions made subsequent to March 15, 1996.
General and Administrative Expenses
For the three months ended March 31, 1997, general and administrative expenses
increased $0.8 million, or 57.7%, to $2.3 million, as compared to $1.5 million
for the three months ended March 31, 1996. The increase was primarily due to the
expenses associated with exploring strategic alternatives to maximize unitholder
value. On March 3, 1997, the Partnership decided to terminate its efforts to
seek a merger or possible sale of the Partnership at this time.
13
<PAGE>
Net Interest Expense
For the three months ended March 31, 1997, interest expense increased $0.1
million, or 2.9%, to $1.8 million, as compared to $1.7 million for the three
months ended March 31, 1996. This change was primarily due to an increase in
working capital borrowings.
Net Income
For the three months ended March 31, 1997, net income declined $1.9 million, or
26.4%, to $5.3 million, as compared to $7.2 million for the three months ended
March 31, 1996. The decline in net income was attributable to the impact on
volume of warmer temperatures and higher propane prices, and the one-time
expenses associated with the terminated strategic initiative. Offsetting these
factors were improved retail margins across all market segments and growth in
the Partnership's customer base provided by acquisitions and internal marketing.
EBITDA
For the three months ended March 31, 1997, EBITDA (defined as operating income
plus depreciation and amortization less net gain (loss) on sales of assets)
declined $1.7 million, or 15.2%, to $9.7 million, as compared to $11.5 million
for the three months ended March 31, 1996. Excluding approximately $0.9 million
of one-time expenses relating to the strategic initiative, EBITDA declined only
$0.8 million primarily due to the weather related volume decline. 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) but provides additional information for
evaluating the Partnership's ability to make the Minimum Quarterly Distribution.
Liquidity and Capital Resources
For the six months ended March 31, 1997, net cash provided by operating
activities was $15.2 million. Net income of $11.2 million and non-cash charges
of $5.5 million provided $16.7 million in cash which was used to finance a net
increase in operating assets of $1.5 million. Net cash used in investing
activities was $3.6 million as the proceeds from sales of certain fixed assets
were used to partially fund $3.8 million of growth and maintenance capital
expenditures. Cash flow used in financing activities was $8.4 million as $2.4
million borrowed under the Partnership's credit facilities was repaid and
Partnership distributions of $5.9 million were made. As a result of the above
activities, cash at March 31, 1997 increased by $3.2 million to $4.3 million, as
compared to $1.1 million on hand at the beginning of the period.
Based on its current cash position, bank credit availability and expected net
cash flow from operating activities, the Partnership expects to be able to meet
all of its above obligations for fiscal 1997, as well as all of its other
current obligations as they become due. For the remainder of fiscal 1997, the
Partnership anticipates paying interest on the First Mortgage Notes of $3.4
million and anticipates paying Limited and General Partner distributions of $5.9
million.
14
<PAGE>
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits Included Within:
------------------------
(27) Financial Data Schedule
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K have been filed during the quarter
for which this report is filed.
15
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized:
Star Gas Partners, L.P.
By: Star Gas Corporation
(General Partner)
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
By: /s/ William G. Powers, Jr.
------------------------------------------------ President May 14, 1997
William G. Powers, Jr. Star Gas Corporation
(Principal Executive Officer)
By: /s/ Richard F. Ambury
------------------------------------------------ Vice President - Finance May 14, 1997
Richard F. Ambury Star Gas Corporation
(Principal Financial and Accounting Officer)
</TABLE>
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0001002590
<NAME> STAR GAS PARTNERS, L.P.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 4,319
<SECURITIES> 0
<RECEIVABLES> 12,362
<ALLOWANCES> 378
<INVENTORY> 3,552
<CURRENT-ASSETS> 21,322
<PP&E> 113,744
<DEPRECIATION> 16,004
<TOTAL-ASSETS> 158,678
<CURRENT-LIABILITIES> 6,739
<BONDS> 85,000
0
0
<COMMON> 66,426<F1>
<OTHER-SE> 273<F2>
<TOTAL-LIABILITY-AND-EQUITY> 158,678
<SALES> 94,784
<TOTAL-REVENUES> 97,318
<CGS> 53,946
<TOTAL-COSTS> 23,041
<OTHER-EXPENSES> 5,248
<LOSS-PROVISION> 204
<INTEREST-EXPENSE> 3,649
<INCOME-PRETAX> 11,230
<INCOME-TAX> 13
<INCOME-CONTINUING> 11,217
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,217
<EPS-PRIMARY> 2.09
<EPS-DILUTED> 2.09
<FN>
<F1>1. COMMON STOCK - IN DECEMBER 1995 STAR GAS PARTNERS, L.P. ISSUED COMMON AND
SUBORDINATED UNITS WHICH REPRESENT LIMITED PARTNER INTERESTS. THESE UNITS ARE
CONSIDERED TO POSSESS THE CHARACTERISTICS OF COMMON STOCK AND ARE BOTH INCLUDED
IN THE DETERMINATION OF EPS.
<F2>2. OTHER SE - REPRESENTS THE GENERAL PARTNER'S INTEREST IN THE PARTNERSHIP
AND IS CLASSIFIED HERE SINCE IT DOES NOT POSSESS THE RELEVANT CHARACTERISTICS
OF EITHER COMMON OR PREFERRED STOCK.
</FN>
</TABLE>
