<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, 1999
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
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 Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of April 30, 1999:
Star Gas Partners, L.P. 13,251,667 Common Units
2,476,797 Senior Subordinated Units
345,366 Junior Subordinated Units
325,729 General Partner Units
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PAGE
----
Part I Financial Information:
Item 1 - Condensed Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 1998 and March 31, 1999 3
Condensed Consolidated Statements of Operations for the
Three months ended March 31, 1998 and March 31, 1999
Six months ended March 31, 1998 and March 31, 1999 4
Condensed Consolidated Statements of Cash Flows for the
six months ended March 31, 1998 and March 31, 1999 5
Condensed Consolidated Statement of Partners' Capital for
the six months ended March 31, 1999 6
Notes to Condensed Consolidated Financial Statements 7-23
Item 2 - Management's Discussion and Analysis of Financial
Conditions and Results of Operations 24-31
Item 3 - Quantitative and Qualitative Disclosures
About Market Risk 31
Part II Other Information:
Item 4 - Submission of Matters to a Vote of Security
Holders 32
Item 6 - Exhibits and Reports on Form 8-K 33
Signature 34
2
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
March 31,
September 30, 1999
1998 (unaudited)
---- ---------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,115 $ 11,738
Receivables, net of allowance of $252 and $1,716 respectively 5,279 81,476
Inventories 10,608 16,313
Prepaid expenses and other current assets 945 5,452
-------- --------
Total current assets 17,947 114,979
-------- --------
Property and equipment, net 110,262 148,421
Intangibles and other assets, net 51,398 318,510
-------- --------
Total assets $179,607 $581,910
======== ========
Liabilities and Partners' Capital
Current liabilities:
Accounts payable $ 3,097 $ 13,602
Bank credit facility borrowings 4,770 -
Current maturities of long-term debt 692 3,510
Accrued expenses 3,315 27,810
Unearned service contract revenue - 13,020
Customer credit balances 6,038 15,759
-------- --------
Total current liabilities 17,912 73,701
-------- --------
Long-term debt 104,308 272,242
Other long-term liabilities 40 7,286
Deferred income taxes - 40,000
Partners' Capital:
Common unitholders 58,686 176,308
Subordinated unitholders (1,446) 13,122
General partner 107 (749)
-------- --------
Total Partners' Capital 57,347 188,681
-------- --------
Total Liabilities and Partners' Capital $179,607 $581,910
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
------------------------ ----------------------
1998 1999 1998 1999
----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Sales:
Product $35,946 $49,754 $75,090 $76,903
Installation, service and appliances 1,938 2,347 4,638 5,435
------- ------- ------- -------
Total sales 37,884 52,101 79,728 82,338
Costs and expenses:
Cost of product 15,024 18,877 35,779 29,829
Cost of installation, service and appliances 534 1,604 1,429 2,630
Delivery and branch 9,590 12,030 19,743 22,325
Depreciation and amortization 2,861 3,023 5,641 6,031
General and administrative 1,449 1,727 2,818 3,156
Net (loss) on sales of assets (136) (87) (184) (91)
------- ------- ------- -------
Operating income 8,290 14,753 14,134 18,276
Interest expense, net 1,875 2,361 3,961 4,539
Amortization of debt issuance costs 45 45 90 90
------- ------- ------- -------
Income before income taxes 6,370 12,347 10,083 13,647
Income tax expense 7 32 13 38
------- ------- ------- -------
Net income $ 6,363 $12,315 $10,070 $13,609
======= ======= ======= =======
General Partner's interest in net income $ 127 $ 246 $ 201 $ 272
------ ------- ------- -------
Limited Partners' interest in net income $ 6,236 $12,069 $ 9,869 $13,337
====== ======= ======= =======
Basic and diluted net income per Limited $ 1.00 $ 1.75 $ 1.69 $ 2.03
Partner Unit ====== ======= ======= =======
Basic and diluted weighted average number of
Limited Partner units outstanding 6,228 6,894 5,834 6,571
====== ======= ======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended
March 31,
-------------------------
1998 1999
------------ ------------
Cash flows from operating activities:
Net income $ 10,070 $ 13,609
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,641 6,031
Amortization of debt issuance cost 90 90
Provision for losses on accounts receivable 126 69
Loss on sales of assets 184 91
Changes in operating assets and liabilities:
Increase in receivables (3,964) (5,512)
Decrease in inventories 3,244 7,726
Decrease in other assets 174 130
Decrease in accounts payable (673) (1,164)
Decrease in other current and long-term liabilities (3,024) (13,929)
-------- ---------
Net cash provided by operating activities 11,868 7,141
-------- ---------
Cash flows from investing activities:
Capital expenditures (3,028) (2,351)
Proceeds from sales of fixed assets 159 85
Cash acquired in acquisition 1,825 18,760
Acquisitions (922) -
-------- ---------
Net cash used in investing activities (1,966) 16,494
-------- ---------
Cash flows from financing activities:
Credit facility borrowings 11,060 10,450
Credit facility repayments (11,060) (15,220)
Acquisition facility borrowings 21,000 -
Acquisition facility repayments (21,000) (3,500)
Distributions (6,453) (4,386)
Increase in deferred charges (177) (96)
Proceeds from issuance of Common Units, net 16,089 116,124
Repayment of debt, net (23,000) (192,316)
Redemption of preferred stock - (11,746)
Proceeds from issuance of debt 11,000 87,678
-------- ---------
Net cash used in financing activities (2,541) (13,012)
-------- ---------
Net increase in cash 7,361 10,623
Cash at beginning of period 889 1,115
-------- ---------
Cash at end of period $ 8,250 $ 11,738
======== =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 4,014 $ 4,451
======== =========
Non-cash investing activities:
Acquisitions $(26,467) $ -
Redemption of preferred stock $ - $ (6,858)
Assumption of note payable $ 23,000 $ -
Non-cash financing activities:
Issuance of Common Units $ 3,399 $ 6,858
Additional General Partner interest $ 68 $ -
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Number of Units
-----------------------------------------
Senior Junior General Senior Junior General Partners'
Common Sub. Sub. Sub. Partner Common Sub. Sub. Sub. Partner Capital
------- ------- ------ ------ ------- --------- -------- ------- ------ -------- ----------
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of
September 30, 1998 3,859 2,396 - - - $ 58,686 $(1,446) $ $ - $ 107 $ 57,347
-
Exchange of ownership in
connection with the Star (8,958)
Gas / Petro Transaction (2,396) 2,477 345 326 (2,754) 11,903 797 (988) -
Issuance of Units in 116,124
equity offering 8,720 116,124
Issuance of Units in
redemption of Petro's
12 7/8% Preferred Stock 401 5,399 5,399
Issuance of Units in
redemption of Petro's
Junior Preferred Stock
103 1,459 1,459
Net income 8,715 4,200 368 54 272 13,609
Distributions
($1.10 per unit) (4,246) (140) (4,386)
Other (61) (871) (871)
------------------------------------------------------------------------------------------------------
Balance as of
March 31, 1999 13,022 - 2,477 345 326 $176,308 $ - $12,271 $851 $(749) $188,681
======================================================================================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1) Partnership Organization
Star Gas Partners, L.P. ("Star Gas Partners" or the "Partnership") is a
leading distributor of propane and home heating oil in the United States.
Star Gas Propane, L.P., ("Star Gas Propane") a subsidiary of the
Partnership, markets and distributes propane gas and related appliances to
approximately 166,000 retail and wholesale customers in the Midwest and
Northeast. Petroleum Heat and Power Co., Inc. ("Petro"), a subsidiary of
Star Gas Propane, is the nation's largest distributor of home heating oil
and serves approximately 340,000 customers in the Northeast and Mid-
Atlantic region of the United States. Petro was merged into the
Partnership in a four part transaction as described in footnote 2.
Prior to March 26, 1999, Petro had a 40.5% equity interest in the
Partnership and was its general partner.
2) Acquisition of Petroleum Heat and Power Co., Inc.
On March 26, 1999, the Partnership acquired Petro in a four part
transaction ("Star Gas / Petro Transaction"), which closed concurrently.
This acquisition was accounted for under the purchase method of accounting
and is described below.
Acquisition of Petro
--------------------
On October 22, 1998, Petro, Star Gas Partners, and Star Gas Propane
executed a merger agreement. On February 3, 1999 the parties entered into
an amended and restated merger agreement to reflect changes in the
transaction (the "Merger Agreement"). Under the terms of the Merger
Agreement, a newly formed subsidiary of Star Gas Propane was merged with
Petro, with Petro surviving the merger as a wholly-owned indirect
subsidiary of Star Gas Propane.
As a result of the merger:
. each outstanding share of Petro Class A common stock, par value $0.10 per
share, and Petro Class C common stock, par value $0.10 per share, other
than shares that were exchanged (the "Exchange"), was converted into
0.11758 senior subordinated units (2,476,797 senior subordinated units
issued in total);
. each outstanding share of Petro junior convertible preferred stock was
converted into 0.13064 common units (102,848 total common units); and
. each outstanding share of Petro Series C exchangeable preferred stock due
2009 was converted into the right to receive $10.69 in cash per share
plus accrued and unpaid dividends except for an aggregate of 505,000
shares of Series C preferred stock that were converted into an aggregate
of 400,531 common units, plus accrued and unpaid dividends on the
preferred., and may in the future issue an additional 175,000 Senior
Subordinated Units.
The Exchange occurred immediately prior to the merger and was comprised of
the following elements.
(a) Holders of Petro common stock, consisting of Irik P. Sevin, Audrey L.
Sevin, Hanseatic Corp. and Hanseatic Americas Inc., who are referred to as
the "LLC Owners," formed Star Gas LLC, to which they contributed their
outstanding shares of Petro common stock in exchange for all of the limited
liability company interests in Star Gas LLC. Star Gas LLC contributed those
shares to Star Gas Partners in exchange for general partner units (325,729
general partner units). In addition, the LLC Owners contributed their
remaining shares of Petro common stock to Star Gas Partners in exchange for
junior subordinated units (345,366 junior subordinated units).
(b) Other Petro common stockholders who are affiliates of Petro contributed
shares of Petro common stock to Star Gas Partners in exchange for Star Gas
Partners senior subordinated units.
7
<PAGE>
2) Acquisition of Petroleum Heat and Power Co., Inc. (continued)
Financings and Refinancings
---------------------------
Star Gas Partners offered and sold to the public 8.7 million common units
in an equity offering, the net proceeds of which were approximately $116.1
million. Petro offered and sold, in a private placement, $90.0 million of
senior secured notes, the net proceeds of which were approximately $87.7
million. Star Gas Partners and Petro Holdings (a legal entity created as a
result of the Star Gas / Petro Transaction to be the parent company of all
the former Petro entities) guaranteed the notes.
All of the net proceeds of the equity offering, together with the $87.7
million of net proceeds from the debt offering and $5.4 million of Petro's
cash were used:
. to redeem $80.2 million principal amount of Petro's 12 1/4% Senior
Subordinated Debentures due 2005, $48.7 million principal amount of
Petro's 10 1/8% Senior Subordinated Notes due 2003, $74.3 million
principal amount of Petro's 9 3/8% Senior Subordinated Debentures due
2006 and the $17.4 million of Petro's 12 7/8% preferred stock at an
aggregate redemption price of $201.3 million;
. to repurchase Petro's 1989 preferred stock; and
. to pay for a portion of the expenses of the transaction.
New General Partner
-------------------
Since Star Gas Corporation is a wholly-owned subsidiary of Petro, which
became a subsidiary of the Partnership in the transaction, it was no longer
able to serve as Star Gas Partners' general partner. Star Gas Partners' new
general partner is Star Gas LLC, which is owned by the LLC Owners. Star Gas
LLC's business activities are limited to those related to being the general
partner. Also, simultaneous to this change was the transfer of all Star
Gas Corporation employees to the Operating Partnership.
Amendment of Partnership Agreement
----------------------------------
In order to complete the transaction, Star Gas Partners amended its
partnership agreement and Star Gas Propane's partnership agreement which
were in effect before the transaction. The amendments, among other matters,
increased the Minimum Quarterly Distribution ("MQD") from $0.55 to $0.575
per unit. The increase in the MQD raised the threshold needed to end the
subordination period.
In connection with the Star Gas/Petro transaction, the Senior Subordinated
Units, Junior Subordinated Units and General Partnership Units can earn,
pro rata, 303,000 additional Senior Subordinated Units each year that Petro
meets certain financial goals to a maximum of 909,000 additional Senior
Subordinated Units.
8
<PAGE>
3) Summary of Significant Accounting Policies
Basis of Presentation
The unaudited condensed consolidated financial statements reflect all
adjustments which are, in the opinion of management, necessary for a fair
statement of the interim periods presented. The Consolidated Financial
Statements for the period October 1, 1997 through March 31, 1998 include
the accounts of Star Gas Partners, L.P., Star Gas Propane and its corporate
subsidiary, Stellar Propane Service Corp. Beginning March 26, 1999 the
Condensed Consolidated Financial Statements also include the accounts of
Petro Holdings and its Subsidiaries, a wholly owned subsidiary of the
Partnership resulting from the Star Gas / Petro Transaction. All material
intercompany items and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in accordance 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 revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
Revenue Recognition
Sales of propane, heating oil, and equipment are recognized at the time of
delivery of the product to the customer or at the time of sale, service, or
installation. Revenue from repairs and maintenance service is recognized
upon completion of the service. Payments received from customers for
heating oil equipment service contracts are deferred and amortized into
income over the terms of the respective service contracts, on a straight
line basis, which generally do not exceed one year.
The propane and heating oil industry are seasonal in nature because both
are primarily used for heating in residential and commercial buildings.
Therefore, the results of operations for the period ended March 31, 1998
and March 31, 1999 are not necessarily indicative of the results to be
expected for a full year.
Comprehensive Income
The Partnership's comprehensive income consists of net income and other
comprehensive income, the sole component of which is the minimum pension
liability adjustment from its wholly-owned subsidiary Petro. There were no
minimum pension liability adjustments at March 31, 1998 and March 31, 1999.
Net Income (loss) per Limited Partner Unit
Net income (loss) per Limited Partner Unit is computed by dividing net
income (loss), after deducting the General Partner's interest, by the
weighted average number of Common Units, Senior Subordinated Units, and
Junior Subordinated Units outstanding.
Cash Equivalents
The Partnership considers all highly liquid investments with a maturity of
three months or less, when purchased, to be cash equivalents.
9
<PAGE>
3) Summary of Significant Accounting Policies - (continued)
Inventories
Inventories are stated at the lower of cost or market and are computed on a
first-in, first-out basis.
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost. Depreciation is
computed over the estimated useful lives of the depreciable assets using
the straight-line method.
Intangible Assets
Intangible assets include goodwill, covenants not to compete, customer
lists and deferred charges.
Goodwill is the excess of cost over the fair value of net assets in the
acquisition of a company. Both the propane and heating oil segments
amortize goodwill using the straight-line method over a twenty-five year
period.
Covenants not to compete are non-compete agreements established with the
owners of an acquired company. Covenants not to compete are amortized over
the respective lives of the covenants, which are generally five years.
Customer lists are the names and delivery addresses of the acquired
company's patrons. Based on the historical retention experience of these
lists, the propane segment amortizes customer lists on a straight-line
method over fifteen years, and the heating oil segment amortizes customer
lists on a straight-line method over ten years.
Deferred charges represent the cost associated with the issuance of debt
instruments. Both the propane and heating oil segments amortize deferred
charges using the interest method over the lives of the related debt
instrument.
It is the Partnership's policy to review intangible assets for impairment
whenever events or changes in circumstances indicate that the carrying
amount of such assets may not be recoverable. The Partnership determines
that the carrying values of intangible assets are recoverable over their
remaining estimated lives through undiscounted future cash flow analysis.
If such a review should indicate that the carrying amount of the intangible
assets is not recoverable, it is the Partnership's policy to reduce the
carrying amount of such assets to fair value.
Advertising Expenses
Advertising costs are expensed as they are incurred.
Customer Credit Balances
Customer credit balances represent pre-payments received from customers
pursuant to a budget payment plan (whereby customers pay their estimated
annual propane / heating oil charges on a fixed monthly basis) and the
payments made have exceeded the charges for deliveries.
Environmental Costs
The Partnership expenses, on a current basis, costs associated with
managing hazardous substances and pollution in ongoing operations. The
Partnership also accrues for costs associated with the remediation of
environmental pollution when it becomes probable that a liability has been
incurred and the amount can be reasonably estimated.
10
<PAGE>
3) Summary of Significant Accounting Policies - (continued)
Income Taxes
The Partnership is a master limited partnership. As a result, for Federal
income tax purposes, earnings or losses are allocated directly to the
individual partners. Except for the Partnership's corporate subsidiaries,
no recognition has been given to Federal income taxes in the accompanying
financial statements of the Partnership. While the Partner's corporate
subsidiaries will generate non-qualifying Master Limited Partnership
revenue, dividends from the corporate subsidiaries to the Partnership are
included in the determination of Master Limited Partnership income. In
addition, a portion of the dividends received by the Partnership from the
corporate subsidiaries will be taxable to the limited partners. 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
due to the taxable income allocation requirements of the Partnership
agreement.
The Partnership's corporate subsidiaries file a consolidated Federal Income
Tax return with its heating oil subsidiaries. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amount of assets and
liabilities and their respective tax bases and operating loss
carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. As a
result of the Star Gas / Petro Transaction, the Partnership recorded a $40
million deferred income tax liability, which primarily reflects a
difference in the basis between book and tax for the intangible assets
acquired from Petro.
Accounting Changes
In June 1998 the FASB issued SFAS No. 133 - "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. This statement is effective for all fiscal quarters of all
fiscal years beginning after June 15, 1999. The Partnership is assessing
the impact and disclosure requirements of SFAS No. 133.
4) Quarterly Distribution of Available Cash
In general, the Partnership distributes to its partners on a quarterly
basis all "Available Cash." Available Cash generally means, with respect
to any fiscal quarter, all cash on hand at the end of such quarter less the
amount of cash reserves that are necessary or appropriate in the reasonable
discretion of the General Partner to (1) provide for the proper conduct of
the Partnership's business, (2) comply with applicable law or any of its
debt instruments or other agreements or (3) in certain circumstances
provide funds for distributions to the Common Unitholders and the Senior
Subordinated Unitholders during the next four quarters. The General Partner
may not establish cash reserves for distributions to the Senior
Subordinated Units unless the General Partner has determined that in its
judgment the establishment of reserves will not prevent the Partnership
from distributing the Minimum Quarterly Distribution on all Common Units
and any Common Unit Arrearages thereon with respect to the next four
quarters. Certain restrictions on distributions on Senior Subordinated
Units, Junior Subordinated Units and General Partner Units could result in
cash that would otherwise be Available Cash being reserved for other
purposes. Cash distributions will be characterized as distributions from
either Operating Surplus or Capital Surplus.
The Senior Subordinated Units, the Junior Subordinated Units, and General
Partner Units are each a separate class of interest in Star Gas Partners,
and the rights of holders of those interests to participate in
distributions differ from the rights of the holders of Common Unit.
11
<PAGE>
4) Quarterly Distribution of Available Cash - (continued)
Subsequent to the Star Gas / Petro Transaction, the Partnership intends to
distribute to the extent there is sufficient available cash, at least a
minimum quarterly distribution of $0.575 per unit, or $2.30 per unit on a
yearly basis. In general, available cash will be distributed per quarter
based on the following priorities:
. First, to the common units until each has received $0.575, plus any
arrearages from prior quarters.
. Second, to the senior subordinated units until each has received
$0.575.
. Third, to the junior subordinated units and general partner units
until each has received $0.575.
. Finally, after each has received $0.575, available cash will be
distributed proportionately to all units until target levels are met.
If distributions of available cash exceed target levels greater than
$0.604, the Senior Subordinated Units, Junior Subordinated Units and
General Partner Units will receive incentive distributions.
The subordination period will end once the Partnership has met the
financial tests stipulated in the partnership agreement, but it generally
cannot end before October 1, 2002. However, if the general partner is
removed under some circumstances, the subordination period will end. When
the subordination period ends, all senior subordinated units and junior
subordinated units will convert into Class B common units on a one-for-one
basis, and each common unit will be redesignated as a Class A common unit.
The main difference between the Class A common units and Class B common
units is that the Class B common units will continue to have the right to
receive incentive distributions and additional units.
5) Segment Reporting
In accordance with SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," the Partnership as a result of the
Star Gas / Petro Transaction (see footnote 2), has two reportable segments,
propane and heating oil. Management has chosen to organize the enterprise
under these two segments in order to leverage the expertise it has in each
industry, allow each segment to continue to strengthen its core
competencies, and facilitate a clear means for evaluation.
The propane segment is primarily engaged in the retail distribution of
propane and related supplies and equipment to residential, commercial,
industrial, agricultural and motor fuel customers, operating from fifty-
five branches in the Midwest and nineteen branches in the Northeast.
Propane is used primarily for space heating, water heating and cooking by
the Partnership's residential and commercial customers and as a result,
weather conditions have a significant impact on the demand for propane.
The heating oil segment is primarily engaged in the retail distribution of
home heating oil, related equipment services, and equipment sales to
residential and commercial customers. It operates from twenty-four
branches / depots and thirteen satellites primarily in the Northeast United
States. Home heating oil is principally used by the Partnership's
residential and commercial customers to heat their homes and buildings, and
as a result, weather conditions also have a significant impact on the
demand for home heating oil.
12
<PAGE>
5) Segment Reporting - (continued)
The following are the statement of operations and balance sheets for each
segment as of the periods indicated. The heating oil segment was
consolidated with the propane segment beginning March 26, 1999, subsequent
to the closing of the Star Gas / Petro Transaction.
<TABLE>
<CAPTION>
(in thousands) Six Months Ended Six Months Ended March 31, 1999
---------------------------------
March 31, 1998 Heating
Statement of Operations Propane Oil Propane Consolidated
- ------------------------ ------- - ------- --------- -------------
<S> <C> <C> <C> <C>
Sales:
Product $75,090 $7,908 $68,995 $76,903
Installation, service, and appliance 4,638 225 5,210 5,435
------- ------ ------- -------
Total sales 79,728 8,133 74,205 82,338
Costs and expenses:
Cost of product 35,779 3,697 26,132 29,829
Cost of installation, service, and appliances 1,429 974 1,656 2,630
Delivery and branch 19,743 1,143 21,182 22,325
Depreciation and amortization 5,731 - 6,031 6,031
General and administrative 2,818 150 3,006 3,156
Net (loss) on sales of assets (184) - (91) (91)
------- ------ ------- -------
Operating income 14,044 2,169 16,107 18,276
Interest expense, net 3,961 225 4,314 4,539
Amortization of debt issuance costs - - 90 90
------- ------ ------- -------
Income before income taxes 10,083 1,944 11,703 13,647
Income tax expense 13 25 13 38
------- ------ ------- -------
Net income $10,070 $1,919 $11,690 $13,609
======= ====== ======= =======
Capital expenditures $ 3,028 $ - $ 2,351 $ 2,351
======= ======= ======= =======
(in thousands) March 31, 1999
----------------------------------
September 30, 1998 Heating (1)
Balance Sheet Propane Oil Propane Consolidated
- ------------- ------- ------- ------- ------------
Assets
Current assets:
Cash and cash equivalents $ 1,115 $ 10,095 $ 1,643 $ 11,738
Receivables 5,279 71,314 10,162 81,476
Inventories 10,608 13,431 2,882 16,313
Prepaid expenses and other current assets 945 5,468 846 5,452
-------- -------- -------- --------
Total current assets 17,947 100,308 15,533 114,979
Property and equipment, net 110,262 40,109 108,312 148,421
Investment in Petro Holdings - - 124,891 -
Intangibles and other assets, net 51,398 269,042 49,468 318,510
-------- -------- -------- --------
Total assets $179,607 $409,459 $298,204 $581,910
======== ======== ======== ========
Liabilities and Partners' Capital
Current Liabilities:
Accounts payable $ 3,097 $ 11,669 $ 1,933 $ 13,602
Bank credit facility borrowings 4,770 - - -
Current maturities of long-term debt 692 2,241 1,269 3,510
Accrued expenses 3,315 24,518 3,292 27,810
Unearned service contract revenue - 13,020 - 13,020
Customer credit balances 6,038 13,857 1,902 15,759
-------- -------- -------- --------
Total current liabilities 17,912 65,305 8,396 73,701
Long-term debt 104,308 172,011 100,231 272,242
Other long-term liabilities 40 7,252 34 7,286
Deferred income taxes - 40,000 - 40,000
Partners' Capital 57,347 124,891 189,543 188,681
-------- -------- -------- --------
Total Liabilities and Partners' Capital $179,607 $409,459 $298,204 $581,910
======== ======== ======== ========
</TABLE>
(1) The consolidated amounts include the necessary entries to eliminate
the Investment in Petro Holdings.
13
<PAGE>
6) Inventories
The components of inventory were as follows:
<TABLE>
<CAPTION>
(in thousands) September 30, 1998 March 31, 1999
------------------ ------------------
<S> <C> <C>
Propane gas $ 8,807 $ 1,182
Propane appliances and equipment 1,801 1,700
Fuel oil - 6,962
Fuel oil parts and equipment - 6,469
------- -------
$10,608 $16,313
======= =======
</TABLE>
Substantially all of the Partnership's propane supplies for the Northeast
retail operations are purchased under supply contracts. Certain of the
supply contracts provide for minimum and maximum amounts of propane to be
purchased thereunder, and provide for pricing in accordance with posted
prices at the time of delivery or include a pricing formula that typically
is based on current market prices. Historically, spot purchases from Mont
Belvieu sources accounted for approximately one-third of the Partnership's
total volume of propane purchases. In addition, the three single largest
suppliers in the aggregate account for less than half of total propane
purchases.
The Partnership obtains home heating oil in either barge or truckload
quantities, and has contracts with over 80 terminals for the right to
temporarily store its heating oil at facilities not owned by the
Partnership. Purchases are made pursuant to supply contracts or on the
spot market. The Partnership has market price based contracts for
substantially all its petroleum requirements with 12 different suppliers,
the majority of which have significant domestic sources for their product,
and many of which have been suppliers for over 10 years. Typically supply
contracts have terms of 12 months. All of the supply contracts provide for
maximum and in some cases minimum quantities, and in most cases the price
is based upon the market price at the time of delivery.
The Partnership may enter into forward contracts with Mont Belvieu
suppliers or refineries which call for a fixed price for the product to be
purchased based on current market conditions, with delivery occurring at a
later date. In most cases the Partnership has entered into similar
agreements to sell this product to customers for a fixed price based on
market conditions. In the event that the Partnership enters into these
types of contracts without a subsequent sale, it is exposed to some market
risk. Currently, the Partnership does not have any contracts that if
market conditions were to change, would have a material affect on its
financial statements.
Concentration of Revenue with Guaranteed Maximum Price Customers
Approximately 25% of the volume sold in the Partnership's heating oil
segment is sold to individual customers under an agreement pre-establishing
the maximum sales price of home heating oil over a twelve month period. The
maximum price at which home heating oil is sold to these capped-price
customers is generally renegotiated in the Spring of each year based on
current market conditions. The heating oil segment currently enters into
forward purchase contracts and futures contracts for a substantial majority
of the heating oil it sells to these capped-price customers in advance and
at a fixed cost. Should events occur after a capped-sales price is
established that increases the cost of home heating oil above the amount
anticipated, margins for the capped-price customers whose heating oil was
not purchased in advance would be lower than expected, while those
customers whose heating oil was purchased in advance would be unaffected.
Conversely, should events occur during this period that decrease the cost
of heating oil below the amount anticipated, margins for the capped-price
customers whose heating oil was purchased in advance could be lower than
expected, while those customers whose heating oil was not purchased in
advance would be unaffected or higher than expected.
14
<PAGE>
6) Inventories - (continued)
In accordance with SFAS No. 80, "Accounting for Futures Contracts," futures
contracts are classified as a hedge when the item to be hedged exposes the
company to price risk and the futures contract reduces that risk exposure.
Future contracts that relate to transactions that are expected to occur are
accounted for as a hedge when the significant characteristics and expected
terms of the anticipated transactions are identified and it is probable
that the anticipated transaction will occur. If a transaction does not
meet the criteria to qualify as a hedge, it is considered to be
speculative. Any gains or losses associated with futures contracts which
are classified as speculative are recognized in the current period. If a
futures contract that has been accounted for as a hedge is closed or
matures before the date of the anticipated transaction, the accumulated
change in value of the contract is carried forward and included in the
measurement of the related transaction. Option contracts are accounted for
in the same manner as futures contracts. At March 31, 1999 the heating oil
segment had futures contracts to buy 5.2 million gallons of #2 home heating
oil with a notional and fair market value totaling $2.3 million
respectively.
At March 31, 1999 the heating oil segment also had 3.3 million gallons of
heating oil forward purchase contracts which expire at various times with
no contract expiring later than September 1999. The unrealized losses on
the heating oil segment's hedging activity was less than $0.1 million at
March 31, 1999. This hedging activity is designed to help the heating oil
segment achieve its planned margins and represents approximately 25% of the
expected total home heating volume sold in a twelve month period.
The carrying amount of all hedging financial instruments at March 31, 1999
was $42,000 and were included in Prepaid Expenses on the Condensed
Consolidated Balance Sheet. The risk that counterparties to such
instruments may be unable to perform is minimized by limiting the
counterparties to major oil companies and major financial institutions,
including the New York Mercantile Exchange. The Partnership does not
expect any losses due to such counterparty default.
7) Property, Plant and Equipment
The components of property, plant, and equipment and their estimated useful
lives were as follows:
<TABLE>
<CAPTION>
(in thousands)
September 30, 1998 March 31, 1999 Estimated Useful Lives
------------------ -------------- ----------------------
<S> <C> <C> <C>
Land $ 4,635 $ 12,049
Buildings and leasehold
improvements 10,313 16,631 4 - 30 years
Fleet and other equipment 16,918 33,088 3 - 30 years
Tanks and equipment 102,493 105,044 8 - 30 years
Furniture and fixtures 2,833 12,477 5 - 12 years
-------- --------
Total 137,192 179,289
Less accumulated depreciation 26,930 30,868
-------- --------
Total $110,262 $148,421
======== ========
</TABLE>
15
<PAGE>
8) Intangibles and Other Assets
The components of intangibles and other assets were as follows at the
indicated dates:
<TABLE>
<CAPTION>
(in thousands) September 30, 1998 March 31, 1999 Useful Lives
------------------ ------------------------------------- ------------
(Propane) (Propane) (Heating Oil) Total
<S> <C> <C> <C> <C> <C>
Goodwill $25,690 $25,690 $172,005 $197,695 25 years
Covenants not to compete 2,341 2,341 - 2,341 5 years
Customer lists 34,028 34,028 94,000 128,028 10 - 15 years
Deferred charges 2,907 2,873 2,322 5,195 6 - 14 years
------- ------- -------- --------
Total intangibles 64,966 64,932 268,327 333,259
Less accumulated amortization 13,568 15,564 - 15,564
------- ------- -------- --------
Net intangibles 51,398 49,368 268,327 317,695
Other assets - 100 715 815
------- ------- -------- --------
Intangibles and other assets $51,398 $49,468 $269,042 $318,510
======= ======= ======== ========
</TABLE>
The table below summarizes the allocation by Star Gas Partners of the excess of
purchase price over book value related to the acquisition of Petro. The
allocation of the purchase price is based on the results of an appraisal of
property, plant and equipment, customer lists and the March 26, 1999 recorded
values for tangible assets and liabilities.
The allocation is as follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Consideration given for the exchange of Petro shares $ 20,822
Fair market value of Petro's assets and liabilities as of March 26, 1999:
Current assets (107,102)
Property, plant and equipment (1) (40,109)
Value of Petro's investment in Star Gas (21,864)
Current liabilities 76,717
Long-term debt 276,568
Deferred income taxes 40,000
Other liabilities 7,251
Preferred stock 12,978
Junior preferred stock 1,459
---------
Sub-total 245,898
---------
Total value assigned to intangibles and other assets $ 266,720
=========
Consisting of:
Customer lists $ 94,000
Goodwill 172,005
Other assets 715
--------
Sub-total 266,720
Deferred debt issuance cost (2) 2,322
--------
Total heating oil intangibles $269,042
========
</TABLE>
(1) Includes fair market value adjustment of $13.4 million.
(2) Incurred in connection with Petro's issuance of $90.0 million senior
secured notes.
The fair market value for property, plant and equipment, excluding real estate,
was established using the replacement cost approach method. The market approach
was used in valuing the real estate. The value assigned to customer lists was
derived using a discounted cash flow analysis. The cash attributable to the
customer lists were discounted back at an equity risk adjusted cost of capital
to the net present value. Any excess was attributable to goodwill.
16
<PAGE>
9) Acquisitions
During fiscal 1998, the Partnership acquired seven unaffiliated retail
propane dealers with an aggregate cost of $35.6 million. The acquisitions
were accounted for under the purchase method of accounting. Since these
acquisitions were completed after the heating season, the Partnership could
not fully determine the impact of customer losses on the useful life of the
customer lists acquired. As a result, the Partnership assigned a useful
life of 15 years to these acquired customer lists, and has continued to
monitor customer losses from these acquisitions in order to make any
necessary adjustments.
The following table indicates the allocation of the aggregate purchase
prices paid for these acquisitions and the respective periods of
amortization assigned.
(in thousands) Useful Lives
Land $ 492 -
Buildings 1,381 30 years
Furniture and equipment 153 10 years
Fleet 1,613 5 - 30 years
Tanks and equipment 14,829 5 - 30 years
Customer lists 5,231 15 years
Restrictive covenants 300 5 years
Goodwill 11,503 25 years
Deferred charges 56 6 years
-------
Total $35,558
=======
The most significant transaction was the acquisition of the Pearl Gas Co.,
"Pearl". In October 1997, pursuant to a purchase agreement, the General
Partner purchased 240 shares of Common Stock ($100 par value) of Pearl,
representing all of its issued and outstanding capital stock. The purchase
price was $23.0 million and included working capital of $1.9 million and
$0.4 of transaction expenses. Funding for this purchase was provided by a
$23.0 million bank acquisition facility.
The General Partner then contributed to the Partnership all of the assets
it obtained in the stock purchase of Pearl Gas in exchange for a 2.7%
interest in the Partnership and the assumption of all liabilities
associated with the Pearl stock including the $23.0 million of bank debt.
Subsequent to the acquisition, Pearl was merged into the General Partner as
part of a tax-free liquidation. The General Partner purchased the
outstanding shares of Common Stock of Pearl and subsequently conveyed the
assets obtained in connection with this purchase, primarily to accommodate
the prior owners desire to sell stock as opposed to assets and to complete
the transaction using the most tax advantaged method possible.
The aggregate value of the interests transferred to Star Gas from the
Partnership was $3.5 million representing a .00027 General Partner interest
and 147,727 Common Units in the Partnership. This amount was intended to
compensate Star Gas for additional significant income tax liabilities which
would be reflected in the consolidated federal income tax return of the
General Partner's parent corporation, Petro, and was based upon an average
of the of the Partnership's Common Units.
The issuance of such partnership interests was approved by the Audit
Committee of Star Gas and the Executive Committee of Petro.
The acquisitions were accounted for under the purchase method of
accounting. Purchase prices have been allocated to the acquired assets and
liabilities based on their respective fair market values on the dates of
acquisition. The purchase prices in excess of the fair values of net
assets acquired were classified as intangibles in the Condensed
Consolidated Balance Sheets. Sales and net income have been included in the
Condensed Consolidated Statements of Operations from the respective dates
of acquisition.
17
<PAGE>
9) Acquisitions - (continued)
The following unaudited pro forma information presents the results of
operations of the Partnership and the acquisitions previously described,
including the acquisition of Petro as described in footnote 2 as if the
acquisitions had taken place on October 1, 1997.
(in thousands) Six Months Ended March 31,
--------------------------
1998 1999
---- ----
Sales $425,229 $376,422
======== ========
Net income $ 46,099 $ 56,703
======== ========
General Partner's interest in net income
$ 916 $ 1,126
Limited Partners' interest in net income ======== ========
$ 45,183 $ 55,577
Basic and Diluted net income per limited partner ======== ========
unit
$ 2.81 $ 3.46
======== ========
10) Long-Term Debt and Working Capital Borrowings
Long-term debt consisted of the following at the indicated dates:
(in thousands) September 30, March 31,
1998 1999
------------------ ------------
Star Gas:
8.04% First Mortgage Notes (a) $ 85,000 $ 85,000
7.17% First Mortgage Notes (a) 11,000 11,000
Acquisition Facility Borrowings - Star Gas (b) 9,000 5,500
Petro:
7.92% Senior Notes (c) - 90,000
9.0% Senior Notes (d) - 62,697
10.25% Senior and Subordinated Notes (e) - 4,280
Acquisition Facility Borrowings - Petro (f) - 1,600
Acquisition Notes Payable (g) - 12,653
Subordinated Debentures (h) - 3,022
-------- --------
Total 105,000 275,752
Less current maturities (692) (3,510)
-------- --------
Total $104,308 $272,242
======== ========
(a) In December 1995, the General Partner issued $85.0 million of first
mortgage notes (the "First Mortgage Notes") with an annual interest rate of
8.04%. These notes were assumed as part of the Star Gas Conveyance by the
Operating Partnership. In January 1998, the Operating Partnership issued
an additional $11.0 of First Mortgage Notes with an annual interest rate of
7.17%. The Operating Partnership's obligations under the First Mortgage
Note Agreements are secured, on an equal basis with the Operating
Partnership's obligations under the Bank Credit Facilities, by a mortgage
on substantially all of the real property and liens on substantially all of
the operating facilities, equipment and other assets of the Operating
Partnership. The First Mortgage Notes will mature September 15, 2010, and
will require semiannual prepayments, without premium on the principal
thereof, beginning on March 15, 2001. Interest on the Notes is payable
semiannually on March 15 and September 15. For the year ended September
30, 1998, the Partnership incurred interest expense in the amount of $7.4
million on the First Mortgage Notes. The First Mortgage Note Agreements
contain various restrictive and affirmative covenants applicable to Star
Gas Propane, including restrictions on the incurrence of additional
indebtedness and restrictions on certain investments, guarantees, loans,
sales of assets and other transactions.
18
<PAGE>
10) Long-Term Debt and Working Capital Borrowings - (continued)
(b) The Star Gas Bank Credit Facilities consist of a $25.0 million
Acquisition Facility and a $12.0 million Working Capital Facility. The
agreement governing the Bank Credit Facilities contains covenants and
default provisions generally similar to those contained in the First
Mortgage Note Agreements. As of September 30, 1998, there were also $4.8
million outstanding in borrowings under the Working Capital Facility. The
Bank Credit Facilities bear interest at a rate based upon, at the
Partnership's option, either the London Interbank Offered Rate plus a
margin or a Base Rate (each as defined in the Bank Credit Facilities). The
Partnership is required to pay a fee for unused commitments which amounted
to $0.1 million for fiscal 1996, $0.2 million for fiscal 1997 and $0.1
million for fiscal 1998. For fiscal 1998, the weighted average interest
rate on borrowings under these facilities was 7.46%.
The Working Capital Facility will expire June 30, 2000, but may be extended
annually thereafter with the consent of the banks. Borrowings under the
Acquisition Facility will revolve until June 30, 1999, after which time any
outstanding loans thereunder, will amortize quarterly in equal principal
payments with a final payment due on September 30, 2002. However, there
must be no amount outstanding under the Working Capital Facility for at
least 30 consecutive days during each fiscal year.
(c) Petro issued $90.0 million of 7.92% Senior Secured Notes in six
separate series in a private placement to institutional investors as part
of the Star Gas / Petro Transaction. The Senior Secured Notes are
guaranteed by Star Gas Partners and are secured equally and ratably with
Petro's existing senior debt and bank credit facilities by Petro's cash,
accounts receivable, notes receivable, inventory and customer list. Each
series of Senior Secured Notes will mature between April 1, 2003 and April
1, 2014. Only interest on each series is due semiannually. On the last
interest payment date for each series, the outstanding principal amount is
due and payable in full.
The note agreements for the senior secured notes contain various negative
and affirmative covenants, including restrictions on payment of dividends
or other distributions by Star Gas Partners on any partnership interest if
the ratio of consolidated pro forma operating cash flow to consolidated pro
forma interest expense, do not meet the requirements in the agreement for
the period of the four most recent fiscal quarters ending on or prior to
the date of the dividend or distribution or an event of default would
exist.
(d) The Petro 9.0% Senior Secured Notes which pay interest semiannually
were issued under agreements that are substantially identical to the
agreements under which the $90.0 million of Senior Secured Notes were
issued, including negative and affirmative covenants. The 9.0% Senior
Notes are guaranteed by Star Gas Partners. The notes have various sinking
fund payments of which the largest are $15.5 million due on October 1,
2000, $15.4 million due on October 1, 2001 and a final maturity payment of
$30.3 million due on October 1, 2002. All such notes are redeemable at the
option of the Partnership, in whole or in part upon payment of a premium as
defined in the note agreement. The holders of these notes have the right
to extend each maturity of the note for a one year period at an annual rate
of 10.9%.
(e) The Petro 10.25% Senior and Subordinated Notes which pay interest
quarterly also were issued under agreements that are substantially
identical to the agreements under which the $90.0 million and 9.0% Senior
Notes were issued. These notes are also guaranteed by Star Gas Partners.
Petro is required to repay $2.2 million on January 15, 2000 and to make a
final maturity payment of $2.1 million on January 15, 2001. No premium is
payable in connection with these required payments. The holders of these
notes have the right to extend each maturity of the note for a one year
period at an annual rate of 14.1%.
19
<PAGE>
10) Long-Term Debt and Working Capital Borrowings - (continued)
(f) The Petro Bank Facilities consist of three separate facilities; a $40
million working capital facility, a $10 million insurance letter of credit
facility and a $50 million acquisition facility. The working capital
facility and letter of credit facility will expire on June 30, 2001. The
acquisition facility will convert to a term loan on June 30, 2001 which
will be payable in eight equal quarterly principal payments. Amounts
borrowed under the working capital facility are subject to a requirement to
maintain a zero balance for 90 consecutive days during the period from
April 1 to September 30 of each year. In addition, each facility will bear
an interest rate that is based on either the London Interbank Offer Rate or
another base rate plus a set percentage. The bank facilities agreement
contains covenants and default provisions generally similar to those
contained in the note agreement for the senior secured notes.
(g) These Petro notes were issued in connection with the purchase of fuel
oil dealers and other notes payable and are due in monthly, quarterly, and
annual installments. Interest is at various rates ranging from 8% to 15%
per annum, maturing at various dates through 2004. Approximately $12.3
million of letter of credits issued under the Petro Bank Acquisition
Facility are issued to support these notes.
(h) Petro also has outstanding $1.3 million of 10 1/8% Subordinated
Debentures due 2003, $0.7 million of 9 3/8% Subordinated Notes due 2006 and
$1.1 million of 12 1/4% Subordinated Notes due 2005. In October 1998, the
indentures under which the 10 1/8%, 9 3/8% and 12 1/4% subordinated notes
were issued were amended to eliminate substantially all of the covenants
provided by the indentures.
As of March 31, 1999, the maturities during fiscal years ending September
30 are set forth in the following table:
(in thousands)
1999 $ 629
2000 13,060
2001 22,272
2002 28,901
2003 55,319
Thereafter 155,571
--------
$275,752
========
As of March 31, 1999, the Partnership was in compliance with all borrowing
covenants, as amended.
11) Employee Benefit Plans
Propane Segment
The propane segment has a 401(k) plan which covers certain eligible non-
union and union employees. Subject to IRS limitations, the 401(k) plan
provides for each employee to contribute from 1.0% to 15.0% of
compensation. The propane segment contributes to non-union participants a
matching amount up to a maximum of 3.0% of compensation. Aggregate matching
contributions made to the 401(k) plan during fiscal 1997 and 1998 were $0.4
million and $0.3 million, respectively. The propane segment also makes
monthly contributions on behalf of its union employees to a union sponsored
defined benefit plan. The amount charged to expense was $0.4 million for
both fiscal 1997 and 1998.
Heating Oil Segment
Effective December 31, 1996, the heating oil segment consolidated all of
its defined contribution pension plans and froze the benefits for nonunion
personnel covered under defined benefit pension plans. In 1997, the
heating oil segment froze the benefits of its New York City union defined
benefit pension plan as a result of operation consolidations.
20
<PAGE>
11) Employee Benefit Plans - (continued)
The defined benefit and defined contribution plans covered substantially
all of the heating oil segment's nonunion employees. Benefits under the
frozen defined benefit plans were generally based on years of service and
each employee's compensation. Benefits under the consolidated defined
contribution plan are based on an employee's compensation. For the heating
oil segment, pension expense under all non-union plans for the twelve
months ended December 31, 1997 and 1998 was $4.0 million and $4.4 million
respectively.
The following tables provide a reconciliation of the changes in the heating
oil segment's plan benefit obligations, fair value of assets, and a
statement of the funded status at the indicated dates:
<TABLE>
<CAPTION>
(in thousands) Twelve Months Ended December 31,
--------------------------------
Reconciliation of Benefit Obligations 1997 1998
- -------------------------------------- ---- ----
<S> <C> <C>
Benefit obligations at beginning of year $29,323 $29,258
Service cost 116 -
Interest cost 1,895 1,930
Actuarial (gain) loss 977 (63)
Benefit payments (1,384) (1,547)
Settlements (1,669) (2,201)
------------ -----------
Benefit obligation at end of year $29,258 $27,377
============ ===========
Reconciliation of Fair Value of Plan Assets
- -------------------------------------------
Fair value of plan assets at beginning of year $20,367 $22,292
Actual return on plan assets 2,780 2,561
Employer contributions 2,458 615
Benefit payments (1,384) (1,547)
Settlements (1,929) (2,883)
----------- ----------
Fair value of plan assets at end of year $22,292 $21,038
=========== ==========
Twelve Months Ended December 31,
--------------------------------
Funded Status 1997 1998
- ------------- ---- ----
Benefit obligation $29,258 $27,377
Fair value of plan assets 22,292 21,038
Unrecognized transition (asset) obligation (52) (39)
Unrecognized prior service cost - -
Unrecognized net actuarial (gain) loss 5,807 4,776
Prepaid (accrued) benefit cost prior to additional liability (1,211) (1,602)
Amount included in comprehensive income 4,646 4,737
------------- --------------
Prepaid (accrued) benefit cost $(5,857) $(6,339)
============= ==============
Weighted-Average Assumptions Used in the Measurement of the
Company's Benefit Obligation as of December 31,
- -----------------------------------------------------------
Discount rate 6.5% 6.5%
Expected return on plan assets 8.5% 8.5%
Rate of compensation increase N/A N/A
</TABLE>
In addition, the heating oil segment made contributions to union-
administered pension plans during the twelve months ended December 31, 1997
and 1998 of $2.5 million, and $2.0 million respectively.
21
<PAGE>
12) Unit Option Plan
On December 20, 1995, the Partnership adopted a Unit Option Plan (the
"Unit Option Plan"), which currently authorizes the issuance of options
(the "Unit Options") and Unit Appreciation Rights ("UARS") covering up to
300,000 Subordinated Units to certain officers and employees of the
Partnership. A total of 40,000 options were granted to key executives in
December 1995. The Unit Options have the following characteristics: 1) an
exercise price of $22 per unit, which is an estimate of the fair market
value of the Subordinated Units at the time of grant, 2) vest over a five
year period, 3) are exercisable after the subordination period has elapsed,
and 4) expire on the tenth anniversary of the date of grant. No UARS have
been granted pursuant to the plan.
As prescribed by SFAS No. 123, compensation expense is recognized by the
Partnership for the unit option plan awards to executives who are not
employees of the Partnership. The amount recorded is calculated by
comparing the fair value of the options granted on the grant date based on
the Black-Scholes model to the market price of the Partnership's units on
that date and amortizing such difference over the vesting period. The
amounts recorded in fiscal years 1996, 1997 and 1998 were not significant.
13) Lease Commitments
The Partnership has entered into certain operating leases for office
space, trucks and other equipment.
Propane Segment
The future minimum rental commitments at September 30, 1998 under leases
having an initial or remaining non-cancelable term of one year or more are
as follows:
(in thousands)
1999 $ 939
2000 808
2001 751
2002 638
2003 285
Thereafter 379
------
Total minimum lease payments $3,800
======
Propane segment rent expense was $1.3 million and $1.2 million for the
years ended 1997 and 1998 respectively.
Heating Oil segment
The heating oil segment leases office space and other equipment under
noncancelable operating leases which expire at various times through 2017.
Certain of the real property leases contain renewal options and require the
heating oil segment to pay property taxes.
The future minimum rental commitments at December 31, 1998 for all heating
oil segment operating leases having an initial or remaining noncancelable
term of one year or more are as follows:
(in thousands)
1999 $ 4,333
2000 3,763
2001 3,194
2002 3,437
2003 3,292
Thereafter 19,056
-------
Total minimum lease payments $37,075
=======
Heating oil segment rental expense under operating leases for the twelve
months ended December 31, 1997 and 1998 was $7.5 million, and $6.6 million
respectively.
22
<PAGE>
14) 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 Partnership.
15) Related Party Transactions
Prior to March 26, 1999 the Partnership was managed by the Star Gas
Corporation, a wholly owned subsidiary of Petro. Pursuant to the
Partnership Agreement that was in effect at the time, Star Gas Corporation
was entitled to reimbursement for all direct and indirect expenses incurred
or payments it made on behalf of the Partnership, and all other necessary
or appropriate expenses allocable to the Partnership or otherwise
reasonably incurred by Star Gas Corporation in connection with operating
the Partnership's business. Indirect expenses were allocated to the
Partnership on a basis consistent with the type of expense incurred. For
example, services performed by employees of Star Gas Corporation on behalf
of the Partnership were reimbursed on the basis of hours worked and rent
expense was reimbursed on the proportion of the square footage leased by
the Partnership. For the fiscal years ended September 30, 1997 and 1998,
the Partnership reimbursed Star Gas Corporation and Petro $17.1 million and
$19.6 million, respectively, representing salary, payroll tax and other
compensation paid to the employees of the Star Gas Corporation, including
$0.2 million and $0.1 million, respectively, paid to Petro for certain
corporate functions such as finance and compliance. In addition, the
Partnership reimbursed Petro $0.9 million and $0.8 million for the fiscal
years ended September 30, 1997 and 1998, respectively, relating to the
Partnership's share of the costs incurred by Petro in conducting the
operations of a certain shared branch location which included managerial
services. As a result of the Star Gas / Petro Transaction, a newly formed
subsidiary of Star Gas Propane was merged with Petro, with Petro surviving
the merger as a wholly-owned indirect subsidiary of Star Gas Propane.
16) Subsequent Events
Cash Distribution
On April 23, 1999 the Partnership announced that it would pay a cash
distribution of $0.575 per common unit for the three months ended March 31,
1999. The distribution is payable on May 14, 1999 to holders of record as
of May 4, 1999.
Over-Allotment of Common Units
In connection with the Star Gas / Petro Transaction, on April 26, 1999 the
Underwriters exercised a 230,000 over-allotment of common units and the
Partnership received $3.1 million in proceeds.
23
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS
Overview
In analyzing the financial results of the Partnership, the following matters
should be considered.
The results of operations for the three and six month periods ended March 31,
1999 include the Petro acquisition from March 26, 1999. Refer to footnote 2 of
the condensed consolidated financial statements for a description of this
transaction.
Propane and heating oil's primary use is for heating in residential and
commercial applications. As a result, weather conditions have a significant
impact on financial performance and should be considered when analyzing changes
in financial performance. In addition, gross margins vary according to customer
mix. For example, sales to residential customers generate higher profit margins
than sales to other customer groups, such as agricultural customers.
Accordingly, a change in customer mix can affect gross margins without
necessarily impacting total sales.
Lastly, the propane and heating oil industries are seasonal in nature with peak
activity occurring during the winter months. Accordingly, results of operations
for the periods presented are not necessarily indicative of the results to be
expected for a full year.
THREE MONTHS ENDED MARCH 31, 1999
COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
- ---------------------------------------------
Volume
For the three months ended March 31, 1999, retail volume of propane and home
heating oil increased 16.4 million gallons, or 48.3%, to 50.5 million gallons,
as compared to 34.0 million gallons for the three months ended March 31, 1998.
This increase was due to 8.0 million gallons provided by the March 26, 1999
acquisition of Petro, the heating oil segment, and an 8.4 million gallon
increase in the propane segment. The 8.4 million gallon increase in the propane
segment was largely due to the impact of colder temperatures, as well as the
additional volume provided by propane acquisitions, internal growth and the
volume attributable to certain customers who delayed their first winter delivery
to the second fiscal quarter. In the Partnership's propane operating areas,
temperatures were 18.7% colder than in the prior year's comparable quarter and
6.2% warmer than normal.
For the three months ended March 31, 1999, wholesale propane volume increased
4.5 million gallons, or 70.7%, to 10.8 million gallons, as compared to 6.3
million gallons for the three months ended March 31, 1998. This increase was
primarily due to the impact of colder temperatures.
Sales
For the three months ended March 31, 1999, sales increased $14.2 million, or
37.5%, to $52.1 million, as compared to $37.9 million for the three months ended
March 31, 1998. This increase was due to $8.1 million provided by the home
heating oil segment and a $6.1 million increase in the propane segment. Sales
rose in the propane segment due to the aforementioned increases in retail and
wholesale propane volume, which were partially offset by lower selling prices.
Selling prices declined versus the prior year's comparable period in response to
lower propane supply costs.
24
<PAGE>
Cost of Product
For the three months ended March 31, 1999, cost of product increased $3.9
million, or 25.6%, to $18.9 million, as compared to $15.0 million for the three
months ended March 31, 1998. Cost of product relating to heating oil sales
accounted for $3.7 million of this increase. In the propane segment, cost of
product increased by $0.2 million, as the impact of higher volume sales was
largely offset by lower propane supply costs.
Cost of Installation, Service and Appliances
For the three months ended March 31, 1999, cost of installation, service and
appliances increased $1.1 million to $1.6 million, as compared to $0.5 million
for the three months ended March 31, 1998. This increase was almost entirely
due to the inclusion of approximately $1.0 million of expenses relating to the
heating oil segment's cost of installation and service.
Delivery and Branch Expenses
For the three months ended March 31, 1999, delivery and branch expenses
increased $2.4 million, or 25.4%, to $12.0 million, as compared to $9.6 million
for the three months ended March 31, 1998. Delivery and branch expenses at the
heating oil segment accounted for $1.1 million of this change. While retail
volume increased 24.7% in the propane segment, operating expenses increased only
12.9%, or $1.3 million, due to economies of scale associated with acquisitions
and internal growth.
Depreciation and Amortization Expenses
For the three months ended March 31, 1999, depreciation and amortization
expenses increased $0.2 million, or 5.7%, to $3.0 million, as compared to $2.9
million for the three months ended March 31, 1998. This increase was largely
due to the impact of propane acquisitions and other fixed asset additions.
General and Administrative Expenses
For the three months ended March 31, 1999, general and administrative expenses
increased $0.3 million, or 19.2%, to $1.7 million, as compared to $1.4 million
for the three months ended March 31, 1998. The increase was primarily due to
the inclusion of $0.2 million of the heating oil segment's general and
administrative expenses.
Interest Expense, net
For the three months ended March 31, 1999, net interest expense increased $0.5
million, or 25.9%, to $2.4 million, as compared to $1.9 million for the three
months ended March 31, 1998. This change was primarily due to an increase in
long-term debt used to finance propane acquisitions and $0.2 million of interest
expense incurred by the heating oil segment.
25
<PAGE>
Net Income
For the three months ended March 31, 1999, net income increased $6.0 million, or
93.5%, to $12.3 million, as compared to $6.4 million for the three months ended
March 31, 1998. The increase in net income was attributable to the impact of
colder temperatures, propane acquisitions and $1.9 million of net income
provided by the heating oil segment.
Earnings before interest, taxes, depreciation and amortization, less net gain
(loss) on sales of equipment (EBITDA)
Earnings before interest, taxes, depreciation and amortization, less net gain
(loss) on sales of equipment (EBITDA) increased $6.6 million, or 58.3%, to $17.9
million, as compared to $11.3 million for the three months ended March 31, 1998.
This increase was due to the impact of colder temperatures as well as the
additional EBITDA provided by propane acquisitions, propane internal growth and
$2.2 million of EBITDA generated by the heating oil segment. 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.
The definition of "EBITDA" set forth above may be different from that used by
other companies.
26
<PAGE>
SIX MONTHS ENDED MARCH 31, 1999
COMPARED TO SIX MONTHS ENDED MARCH 31, 1998
- -------------------------------------------
Volume
For the six months ended March 31, 1999, retail volume of propane and heating
oil increased 7.3 million gallons, or 10.0%, to 79.9 million gallons, as
compared to 72.6 million gallons for the six months ended March 31, 1998. This
increase was due to 8.0 million gallons of additional volume provided by the
heating oil segment from March 26, 1999 to March 31, 1999, which was reduced by
a slight decline in retail volume of 0.8 million gallons in the propane segment.
While retail propane volume was favorably impacted by acquisitions, colder
temperatures and internal growth, which led to a 6.2 million gallon increase in
volume, a 7.0 million gallon reduction in agriculture sales more than offset
these benefits. The abnormal weather conditions during the first fiscal quarter
resulted in a very dry fall harvest, which caused propane demand for crop drying
to be at its lowest level since 1991. In the Partnership's propane operating
areas, temperatures for the six months ending March 31, 1999, were 2.2% colder
than in the prior year's comparable period and 9.3% warmer than normal.
For the six months ended March 31, 1999, wholesale propane volume increased by
1.2 million gallons, or 7.3%, to 17.0 million gallons, as compared to 15.9
million gallons for the six months ended March 31, 1998. This increase was due
to colder temperatures.
Sales
For the six months ended March 31, 1999, sales increased $2.6 million, or 3.3%,
to $82.3 million, as compared to $79.7 million for the six months ended March
31, 1998. This increase was attributable to the $8.1 million additional sales
provided by the heating oil segment, which were partially offset by a $5.5
million decline in propane sales. Propane sales declined due to lower
agricultural sales and lower selling prices in response to lower propane supply
costs. This decline was partially offset by additional propane sales
attributable to propane acquisitions, colder temperatures and propane segment
internal growth.
Cost of Product
For the six months ended March 31, 1999, cost of product decreased $6.0 million,
or 16.6%, to $29.8 million, as compared to $35.8 million for the six months
ended March 31, 1998. This decrease was due to lower propane supply costs of
$9.7 million, partially offset by $3.7 million of costs attributable to the
heating oil segment. While both propane selling prices and propane supply costs
declined on a per gallon basis, the decline in selling prices was less than the
decline in supply costs, which resulted in an increase in per gallon margins
across all propane market segments.
Cost of Installation, Service and Appliances
For the six months ended March 31, 1999, cost of installation, service and
appliances increased $1.2 million, or 84.0%, to $2.6 million, as compared to
$1.4 million for the six months ended March 31, 1998. This increase was
primarily due to $1.0 million of costs relating to the heating oil segment.
Delivery and Branch Expenses
For the six months ended March 31, 1999, delivery and branch expenses increased
$2.6 million, or 13.1%, to $22.3 million, as compared to $19.7 million for the
six months ended March 31, 1998. This increase was due to the inclusion of $1.1
million of heating oil operating costs, $0.8 million of additional operating
costs of acquired propane companies and $0.7 million of additional propane
segment costs associated with wage increases and internal growth.
27
<PAGE>
Depreciation and Amortization
For the six months ended March 31, 1999, depreciation and amortization expenses
increased $0.4 million, or 6.9%, to $6.0 million, as compared to $5.6 million
for the six months ended March 31, 1998, primarily due to the impact of propane
acquisitions and other fixed asset additions.
General and Administrative Expenses
For the six months ended March 31, 1999, general and administrative expenses
increased $0.3 million, or 12.0%, to $3.2 million, as compared to $2.8 million
for the six months ended March 31, 1998. This increase was primarily due to the
inclusion of $0.2 million of heating oil general and administrative expenses.
Interest Expense, net
For the six months ended March 31, 1999, net interest expense increased $0.6
million, or 14.6%, to $4.5 million, as compared to $4.0 million for the six
months ended March 31, 1998. This change was primarily due to an increase in
long-term debt associated with propane acquisitions and $0.2 million of interest
expense associated with the heating oil segment.
Net Income
For the six months ended March 31, 1999, net income increased $3.5 million, or
35.1%, to $13.6 million, as compared to $10.1 million for the six months ended
March 31, 1998. This increase was due to colder temperatures, propane
acquisitions, propane internal growth and $1.9 million of net income provided by
the heating oil segment.
Earnings before interest, taxes, depreciation and amortization, less net gain
(loss) on sales of equipment (EBITDA)
Earnings before interest, taxes, depreciation and amortization, less net gain
(loss) on sales of equipment (EBITDA) increased $4.4 million, or 22.2%, to $24.4
million for the six months ended March 31, 1999, as compared to $20.0 million
for the prior year's comparable period. This increase was due to the impact of
acquisitions, colder weather conditions, higher per gallon propane gross profit
margins and the $2.2 million of EBITDA generated by the heating oil segment.
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. The definition of "EBITDA" set forth above may be
different from that used by other companies.
28
<PAGE>
Liquidity and Capital Resources
As discussed in footnote 2 of the financial statements, an integral element of
the Star Gas / Petro Transaction was the Partnership's March 1999 sale of 8.7
million common units. The net proceeds from this offering, net of underwriter's
discounts, commissions and offering expenses was $116.1 million. These funds,
along with the net proceeds from Petro's $87.7 million concurrent private debt
placement, totaled $203.8 million. To effect the Star Gas / Petro Transaction,
these funds were used to repay $192.3 million of Petro's debt and to redeem
$11.7 million of Petro's preferred stock.
For the six months ended March 31, 1999, net cash provided by operating
activities was $7.1 million, which includes $10.1 million of accrued interest
and preferred dividend payments for Petro, in connection with the Star Gas /
Petro Transaction. The net cash provided by operating activities, combined with
$18.8 million of cash acquired from Petro in the acquisition, and $0.1 million
of proceeds from the sale of fixed assets totaled $26.0 million. Such funds
were utilized for capital expenditures of $2.4 million, net credit facility
repayments of $4.8 million, acquisition facility repayments of $3.5 million and
Partnership distributions of $4.4 million. As a result of the above activity,
the Partnership's cash increased by $10.6 million.
The Partnership's cash requirements for the remainder of fiscal 1999 include
maintenance capital expenditures of approximately $2.0 million. In addition,
the Partnership plans to pay cash distributions of $15.2 million and conclude
its Year 2000 compliance expenditures of $0.6 million. Based on its current
cash position, bank credit availability and net cash from operating activities,
the Partnership expects to be able to meet all of these obligations for fiscal
1999, as well as all of its other current obligations as they become due.
29
<PAGE>
Year 2000
The Year 2000 issue is the result of computer programs using only the last two
digits to indicate the year. If uncorrected, such computer programs will not be
able to interpret dates correctly beyond the year 1999 and, in some cases prior
to that time (as some computer experts believe), which could cause computer
system failures or other computer errors disrupting business operations.
Recognizing the potentially severe consequences of the failure to be Year 2000
compliant, the Partnership's management has developed and implemented a
Partnership-wide program to identify and remedy the Year 2000 issues.
The scope of the Partnership's Year 2000 readiness program includes the review
and evaluation of the Partnership's information technology (IT) such as hardware
and software utilized in the operation of the Partnership's business.
If needed modifications and conversions are not made on a timely basis, the Year
2000 issue could cause interruption in delivering product to customers or
prevent the Partnership from fulfilling their service needs. The Partnership is
currently using internal and external resources to identify and correct systems
that are not Year 2000 compliant.
Since the Partnership does not internally develop software for its own use,
software developed externally is being evaluated for Year 2000 compliance. This
software is being upgraded or replaced if it is determined that it is not
compliant. As part of this program, the Partnership's systems are being
evaluated for meeting current and future business needs and the Partnership is
using this process as an opportunity to upgrade and enhance its information
systems. The Partnership anticipates completing such upgrades and replacements
as needed by September 1999. The Partnership expects that most of these costs
will be capitalized, as they are principally related to adding new hardware and
software applications and functionality. Other costs will continue to be
expensed as incurred. The Partnership's state of readiness to make each
identified area Year 2000 compliant is at the implementation stage.
The Partnership has assessed a total cost of approximately $750,000 to make its
computer systems Year 2000 compliant. Through March 31, 1999 the Company has
incurred approximately $404,000 in Year 2000 compliance expenses for
applications and hardware, and it expects to incur the remaining $346,000
through the summer of 1999 for additional applications and hardware.
Furthermore, the Partnership has also accelerated the planned replacement of its
internal messaging system in order to gain entity-wide Year 2000 messaging
compatibility. Through March 31, 1999 the Partnership has incurred
approximately $30,000 of expenses for this project, and expects to incur an
additional $220,000 by the summer of 1999 to complete the project.
The Partnership's current estimates of the amount of time and costs necessary to
remediate and test its computer systems are based on the facts and circumstances
existing at this time. The estimates were made using assumptions of future
events including the continued availability of existing resources, Year 2000
modification plans, implementation success by third-parties and other factors.
New developments may occur that could affect the Partnership's estimates of the
amount of time and costs necessary to modify and test its IT and non-IT systems
for Year 2000 compliance.
Notwithstanding the substantive work involved in making all its systems Year
2000 compliant, the Partnership could still potentially experience disruptions
to some aspects of its various activities and operations. The Partnership is
developing contingency plans, primarily instituting manual backup systems, in
the event that it experiences Year 2000 related disruptions.
In addition the Partnership has anticipated the possibility that not all of its
vendors, suppliers and other third parties will have taken the necessary steps
to adequately address their Year 2000 issues on a timely basis. In order to
minimize the impact on the Partnership of non-compliance, the Partnership has
been contacting all key suppliers to evaluate their Year 2000 readiness. The
Partnership is preparing contingency plans for those suppliers whose non-
compliance could have a material effect on the Partnership's business
activities.
30
<PAGE>
Accounting Principles Not Yet Adopted
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement is effective for fiscal
years beginning after June 15, 1999. SFAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that entities recognize all derivatives as either assets or liabilities and
measure the instruments at fair value. The accounting for changes in fair value
of a derivative depends upon the intended use of such derivative. The
Partnership is still evaluating the effects of SFAS No. 133.
Statement Regarding Forward-Looking Disclosure
This report includes "forward-looking statements" within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act which represent
the Partnership's expectations or beliefs concerning future events that involve
risks and uncertainties, including those associated with the effect of weather
conditions on the Partnership's financial performance, the price and supply of
propane and / or heating oil, and the ability of the Partnership to obtain new
accounts and retain existing accounts. All statements other than statements of
historical facts included in this Report including, without limitation, the
statements under "Management's Discussion and Analysis of Results of Operations
and Financial Condition" and elsewhere herein, are forward-looking statements.
Although the Partnership believes that the expectations reflected in such
forward-looking statements are reasonable, it can give no assurance that such
expectations will prove to have been correct.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
The Partnership is exposed to interest rate risk primarily through its Bank
Credit facilities. The Partnership utilizes these borrowings to meet its
working capital needs and also to fund the short-term needs of its acquisition
program.
At March 31, 1999, the Partnership had outstanding borrowings of approximately
$7.1 million under its Acquisition Facilities, and no amount under its Letter of
Credit Facility or its Working Capital Facilities. In the event that interest
rates associated with these facilities were to increase 100 basis points, the
impact on future cash flows would be less than $0.1 million annually.
The Partnership also selectively uses derivative financial instruments to manage
its exposure to market risk related to changes in the current and commodity
market price of home heating oil for its heating oil segment. The Partnership
does not hold derivatives for trading purposes. The value of market sensitive
derivative instruments is subject to change as a result of movements in market
prices. Consistent with the nature of hedging activity, associated unrealized
gains and losses would be offset by corresponding decreases or increases in the
purchase price the Partnership would pay for the home heating oil being hedged.
Sensitivity analysis is a technique used to evaluate the impact of hypothetical
market value changes. Based on a hypothetical ten percent increase in the cost
of home heating oil at March 31, 1999, the potential unrealized loss on the
Company's hedging activity would be reduced by $380,000 to a gain of $354,000;
and conversely a hypothetical ten percent decrease would increase the unrealized
losses by $380,000 to a loss of $406,000.
31
<PAGE>
PART II OTHER INFORMATION
-------------------------
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
(a) Special Meeting of Shareholders March 16, 1999.
(c) Proposals
1. Acquisition of Petroleum Heat and Power Co., Inc. through a merger
and an exchange of equity.
For Against Withheld Abstain
--- ------- -------- -------
2,034,331 152,096 - 40,060
2. Amend the partnership agreement to facilitate the transaction.
For Against Withheld Abstain
--- ------- -------- -------
2,027,673 152,103 - 46,711
3. Election of a new general partner.
For Against Withheld Abstain
--- ------- -------- -------
2,011,536 162,791 - 52,160
32
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits Included Within:
-------------------------
(27) Financial data Schedule
(b) Reports on Form 8-K
-------------------
Registrant filed a report on Form 8-K on February 18, 1999, to report
under Item 5., "Other Events," certain historical financial statements
of Petro, in order to permit the registrant to incorporate Petro's
Financial Statements in future SEC filings .
Registrant filed a report on Form 8-K on April 12, 1999, to report
under Item 7., "Financial Statements and Exhibits," the December 31,
1998 financial statements of Petro, the business acquired; to report
the December 31, 1998 Star Gas Partners, L.P. and Subsidiaries,
condensed consolidated pro forma financial information which gives
effect to the acquisition of Petro, by Star Gas Partners, L.P.; and to
report as an exhibit the March 25, 1999 amendment to the Restated
Agreement and plan of Merger dated as of February 3, 1999.
33
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Partnership has duly caused this report to be signed on its behalf of the
undersigned thereunto duly authorized:
Star Gas Partners, L.P.
By: Star Gas LLC (General Partner)
Signature Title Date
- --------- ----- ----
/s/ George Leibowitz Chief Financial Officer May 13, 1999
----------------
George Leibowitz Star Gas LLC
(Principal Financial Officer)
/s/ James J. Bottiglieri Vice President May 13, 1999
---------------------
James J. Bottiglieri Star Gas LLC
34
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM STAR GAS
PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1999
AND CONSOLIDATED STATEMENT OF OPERATIONS FOR THE INTERIM PERIOD OCTOBER 1, 1998
THROUGH MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001002590
<NAME> STAR GAS PARTNERS, L.P.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 11,738
<SECURITIES> 0
<RECEIVABLES> 83,192
<ALLOWANCES> 1,716
<INVENTORY> 16,313
<CURRENT-ASSETS> 114,979
<PP&E> 179,289
<DEPRECIATION> 30,868
<TOTAL-ASSETS> 581,910
<CURRENT-LIABILITIES> 73,701
<BONDS> 272,242
0
0
<COMMON> 188,681
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 581,910
<SALES> 76,903
<TOTAL-REVENUES> 82,338
<CGS> 29,829
<TOTAL-COSTS> 32,459
<OTHER-EXPENSES> 29,807
<LOSS-PROVISION> 1,614
<INTEREST-EXPENSE> 4,539
<INCOME-PRETAX> 13,647
<INCOME-TAX> 38
<INCOME-CONTINUING> 13,609
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,609
<EPS-PRIMARY> 2.03
<EPS-DILUTED> 2.03
</TABLE>
