<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 June 30, 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 July 30, 1999:
Star Gas Partners, L.P. 13,251,667 Common Units
2,476,797 Senior Subordinated Units
345,364 Junior Subordinated Units
325,729 General Partner Units
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARIES
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Part I Financial Information:
Item 1 - Condensed Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 1998 and June 30, 1999 3
Condensed Consolidated Statements of Operations for the
Three months ended June 30, 1998 and June 30, 1999
Nine months ended June 30, 1998 and June 30, 1999 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended June 30, 1998 and June 30, 1999 5
Condensed Consolidated Statement of Partners' Capital
for the nine months ended June 30, 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 6 - Exhibits and Reports on Form 8-K 32
Signature 33
</TABLE>
2
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
June 30,
September 30, 1999
1998 (unaudited)
------------- -----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,115 $ 20,849
Receivables, net of allowance of $252 and $1,759 respectively 5,279 49,588
Inventories 10,608 14,868
Prepaid expenses and other current assets 945 9,260
-------- --------
Total current assets 17,947 94,565
-------- --------
Property and equipment, net 110,262 148,358
Intangibles and other assets, net 51,398 318,793
-------- --------
Total assets $179,607 $561,716
======== ========
Liabilities and Partners' Capital
Current liabilities:
Accounts payable $ 3,097 $ 10,389
Bank credit facility borrowings 4,770 1,400
Current maturities of long-term debt 692 2,331
Accrued expenses 3,315 37,882
Unearned service contract revenue - 12,990
Customer credit balances 6,038 23,690
-------- --------
Total current liabilities 17,912 88,682
-------- --------
Long-term debt 104,308 265,407
Other long-term liabilities 40 7,247
Deferred income taxes - 34,632
Partners' Capital:
Common unitholders 58,686 156,697
Subordinated unitholders (1,446) 10,164
General partner 107 (1,113)
-------- --------
Total Partners' Capital 57,347 165,748
-------- --------
Total Liabilities and Partners' Capital $179,607 $561,716
======== ========
</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 Nine Months Ended
June 30, June 30,
---------------------- ---------------------
1998 1999 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales:
Product $14,347 $ 59,022 $89,437 $135,925
Installation, service and appliances 1,896 20,070 6,534 25,505
------- -------- ------- --------
Total sales 16,243 79,092 95,971 161,430
Costs and expenses:
Cost of product 6,005 28,642 41,784 58,471
Cost of installation, service and appliances 513 24,021 1,942 26,651
Delivery and branch 8,538 32,122 28,280 54,447
Depreciation and amortization 2,868 8,458 8,509 14,489
General and administrative 1,602 4,070 4,420 7,226
Net (loss) on sales of assets (28) (5) (213) (96)
------- -------- ------- --------
Operating income (loss) (3,311) (18,226) 10,823 50
Interest expense, net 1,873 5,221 5,834 9,760
Amortization of debt issuance costs 45 128 135 218
------- -------- ------- --------
Income (loss) before income taxes (5,229) (23,575) 4,854 (9,928)
Income tax expense (benefit) 6 (5,362) 19 (5,324)
------- -------- ------- --------
Net income (loss) $(5,235) $(18,213) $ 4,835 $ (4,604)
======= ======== ======= ========
General Partner's interest in net income (loss) $ (105) $ (364) $ 97 $ (92)
------- -------- ------- --------
Limited Partners' interest in net income (loss) $(5,130) $(17,849) $ 4,738 $ (4,512)
======= ======== ======= ========
Basic and diluted net income per Limited Partner unit $ (0.82) $ (1.11) $ 0.79 $ (0.46)
======= ======== ======= ========
Basic and diluted weighted average number of Limited
Partner units outstanding 6,228 16,011 5,965 9,717
======= ======== ======= ========
</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)
<TABLE>
<CAPTION>
Nine Months Ended June 30,
---------------------------
1998 1999
---------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 4,835 $ (4,604)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 8,509 14,489
Amortization of debt issuance cost 135 218
Provision for losses on accounts receivable 240 168
Loss on sales of assets 213 96
Deferred tax benefit - (5,368)
Other - (7)
Changes in operating assets and liabilities:
Decrease in receivables 579 26,277
Decrease (increase) in inventories (874) 9,195
Decrease (increase) in other assets 85 (4,444)
Decrease in accounts payable (584) (4,377)
Increase (decrease) in other current and long-term
liabilities (375) 2,313
-------- ---------
Net cash provided by operating activities 12,763 33,956
-------- ---------
Cash flows from investing activities:
Capital expenditures (3,825) (4,936)
Proceeds from sales of fixed assets 245 137
Cash acquired in acquisition 1,825 18,760
Acquisitions (5,259) (2,581)
-------- ---------
Net cash provided by (used in) investing
activities (7,014) 11,380
-------- ---------
Cash flows from financing activities:
Credit facility borrowings 13,280 11,850
Credit facility repayments (12,330) (15,220)
Acquisition facility borrowings 21,000 -
Acquisition facility repayments (21,000) (7,000)
Distributions (9,949) (12,005)
Increase in deferred charges (177) (927)
Proceeds from issuance of Common Units, net 16,089 118,824
Repayment of debt, net (23,000) (197,053)
Redemption of preferred stock - (11,746)
Proceeds from issuance of debt 11,000 87,552
Other - 123
-------- ---------
Net cash used in financing activities (5,087) (25,602)
-------- ---------
Net increase in cash 662 19,734
Cash at beginning of period 889 1,115
-------- ---------
Cash at end of period $ 1,551 $ 20,849
======== =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 3,959 $ 10,616
======== =========
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 $ -
</TABLE>
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
Common Sub. Sub. Sub. Partner Common Sub. Sub. Sub. Partner
------- ------- ------ ------ ------- --------- -------- -------- ------- ---------
<S> <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
Exchange of ownership in
connection with the Star
Gas / Petro Transaction (2,396) 2,477 345 326 (8,958) (2,754) 11,903 797 (988)
Issuance of Units in
equity offering (including
exercise of overallotment) 8,950 118,824
Issuance of Units in
redemption of Petro's
12 7/8% Preferred Stock 401 5,399
Issuance of Units in
redemption of Petro's
Junior Preferred Stock 103 1,459
Net loss (5,977) 4,200 (2,404) (331) (92)
Distributions
($1.675 per common unit) (11,865) (140)
Other (61) (871) 199
----------------------------------------------------------------------------------------------
Balance as of
June 30, 1999 13,252 - 2,477 345 326 $156,697 $ - $ 9,698 $ 466 $(1,113)
==============================================================================================
<CAPTION>
Partners'
Capital
---------
<S> <C>
Balance as of
September 30, 1998 $ 57,347
Exchange of ownership in
connection with the Star
Gas / Petro Transaction -
Issuance of Units in
equity offering (including
exercise of overallotment) 118,824
Issuance of Units in
redemption of Petro's
12 7/8% Preferred Stock 5,399
Issuance of Units in
redemption of Petro's
Junior Preferred Stock 1,459
Net loss (4,604)
Distributions
($1.675 per common unit) (12,005)
Other (672)
--------
Balance as of
June 30, 1999 $165,748
========
</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 168,000 retail and wholesale customers in the Midwest and
Northeast. Petro Holdings, Inc. ("Petro"), a subsidiary of Star Gas
Propane, is the nation's largest distributor of home heating oil and serves
approximately 335,000 customers in the Northeast and Mid-Atlantic region of
the United States. Petro was acquired by 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 a subsidiary of Petro was its general partner.
2) Acquisition of Petro
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 receive 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 (345,364 junior subordinated units).
(b) Other Petro common stockholders who were 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 9.0 million common units
in an equity offering (including 230,000 overallotment common units), the
net proceeds of which were approximately $118.8 million. Petro offered and
sold, in a private placement, $90.0 million of senior secured notes, the
net proceeds of which were approximately $87.6 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 $87.6
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 sole business activity is being the general partner. Also,
simultaneous to this change was the transfer of all Star Gas Corporation
employees to Star Gas Propane.
Amendment of Partnership Agreement
----------------------------------
In order to complete the transaction, Star Gas Partners amended its
partnership agreement and Star Gas Propane's partnership agreement to 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 up 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 June 30, 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 June 30, 1998 and
June 30, 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 June 30, 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. 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's heating oil subsidiary Petro, 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. At June 30, 1999 this amount was partially offset by
the $5.4 million deferred tax asset generated by Petro's net operating loss
carryforwards.
Accounting Changes
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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. In June 1999, FASB amended the effective date for
SFAS No. 133 to all fiscal quarters of all fiscal years beginning after
June 15, 2000. 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.
In accordance with the merger agreement, distributions will not be made on
the senior subordinated units, junior subordinated units, or general
partner units until February 2000 at the earliest.
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) Three Months Ended
-------------------------------------------------------
June 30, 1999
---------------------------------------
June 30, 1998 Heating
Statement of Operations Propane Oil Propane Consolidated
- ----------------------- -------------- --------- -------------- -------------
<S> <C> <C> <C> <C>
Sales:
Product $14,347 $ 45,404 $ 13,618 $ 59,022
Installation, service,
and appliance 1,896 18,056 2,014 20,070
------- -------- -------- --------
Total sales 16,243 63,460 15,632 79,092
Costs and expenses:
Cost of product 6,005 23,455 5,187 28,642
Cost of installation, service,
and appliances 513 23,316 705 24,021
Delivery and branch 8,538 22,583 9,539 32,122
Depreciation and
amortization 2,868 5,423 3,035 8,458
General and administrative 1,602 2,439 1,631 4,070
Net (loss) on sales of assets (28) 2 (7) (5)
------- -------- -------- --------
Operating income (loss) (3,311) (13,754) ( 4,472) (18,226)
Interest expense, net 1,873 3,261 1,960 5,221
Amortization of debt issuance
costs 45 83 45 128
------- -------- -------- --------
Income (loss) before
income taxes (5,229) (17,098) (6,477) (23,575)
Income tax expense (benefit) 6 (5,368) 6 (5,362)
------- -------- -------- --------
Net income (loss) $(5,235) $(11,730) $ (6,483) $(18,213)
======= ======== ======== ========
Capital expenditures $ 797 $ 1,121 $ 1,464 $ 2,585
======= ======== ======== ========
<CAPTION>
(in thousands) Nine Months Ended
--------------------------------------------------------
June 30, 1999
----------------------------------------
June 30, 1998 Heating
Statement of Operations Propane Oil Propane Consolidated
- ----------------------- ------------- --------- -------------- -------------
<S> <C> <C> <C> <C>
Sales:
Product $89,437 $ 53,312 $82,613 $135,925
Installation, service,
and appliance 6,534 18,281 7,224 25,505
------- -------- ------- --------
Total sales 95,971 71,593 89,837 161,430
Costs and expenses:
Cost of product 41,784 27,152 31,319 58,471
Cost of installation, service,
and appliances 1,942 24,290 2,361 26,651
Delivery and branch 28,280 23,726 30,721 54,447
Depreciation and
amortization 8,509 5,423 9,066 14,489
General and administrative 4,420 2,589 4,637 7,226
Net (loss) on sales of assets (213) 2 (98) (96)
------- -------- ------- --------
Operating income (loss) 10,823 (11,585) 11,635 50
Interest expense, net 5,834 3,486 6,274 9,760
Amortization of debt issuance
costs 135 83 135 218
------- -------- ------- --------
Income (loss) before
income taxes 4,854 (15,154) 5,226 (9,928)
Income tax expense (benefit) 19 (5,343) 19 (5,324)
------- -------- ------- --------
Net income (loss) $ 4,835 $ (9,811) $ 5,207 $ (4,604)
======= ======== ======= ========
Capital expenditures $ 3,825 $ 1,121 $ 3,815 $ 4,936
======= ======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
(in thousands) June 30, 1999
-------------------------------------
September 30, 1998 Heating (1)
Balance Sheet Propane Oil Propane Consolidated
- ------------- ------------------ -------- ------------- ------------
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,115 $ 20,541 $ 308 $ 20,849
Receivables 5,279 43,957 5,631 49,588
Inventories 10,608 10,863 4,005 14,868
Prepaid expenses and other current assets 945 9,147 1,335 9,260
-------- -------- -------- --------
Total current assets 17,947 84,508 11,279 94,565
Property and equipment, net 110,262 40,091 108,267 148,358
Investment in Petro Holdings - - 107,476 -
Intangibles and other assets, net 51,398 269,513 49,280 318,793
-------- -------- -------- --------
Total assets $179,607 $394,112 $276,302 $561,716
======== ======== ======== ========
Liabilities and Partners' Capital
Current Liabilities:
Accounts payable $ 3,097 $ 8,143 $ 2,246 $ 10,389
Bank credit facility borrowings 4,770 - 1,400 1,400
Current maturities of long-term debt 692 2,331 - 2,331
Accrued expenses 3,315 32,924 5,307 37,882
Unearned service contract revenue - 12,990 - 12,990
Customer credit balances 6,038 20,970 2,720 23,690
-------- -------- -------- --------
Total current liabilities 17,912 77,358 11,673 88,682
Long-term debt 104,308 167,407 98,000 265,407
Other long-term liabilities 40 7,239 8 7,247
Deferred income taxes - 34,632 - 34,632
Partners' Capital 57,347 107,476 166,621 165,748
-------- -------- -------- --------
Total Liabilities and Partners' Capital $179,607 $394,112 $276,302 $561,716
======== ======== ======== ========
</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:
(in thousands) September 30, 1998 June 30, 1999
------------------ -----------------
Propane gas $ 8,807 $ 2,031
Propane appliances and equipment 1,801 1,974
Fuel oil - 4,333
Fuel oil parts and equipment - 6,530
------- -------
$10,608 $14,868
======= =======
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 prior to the heating season 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 June 30, 1999 the heating oil
segment had futures contracts to buy 50.7 million gallons of home heating
oil with a notional and fair market value totaling $25.6 million and $26.0
million respectively; the propane segment had options to buy 5.0 million
gallons of propane with a notional and fair market value totaling $1.6
million and $1.8 million respectively.
At June 30, 1999 the heating oil segment also had 1.0 million gallons of
heating oil forward purchase contracts which expire at various times with
no contract expiring later than September 1999; the propane segment did not
have any forward purchase contracts. At June 30, 1999, the unrealized
gains on the heating oil segment and propane segment hedging activity was
approximately $0.5 million and $0.2 million respectively. The heating oil
segment's hedging activity is designed to help it achieve its planned
margins and represents approximately 25% of the expected total home heating
oil volume sold in a twelve month period. The propane segment's hedging
activity is also designed to help it achieve its planned margins and
represents approximately 5% of the expected total propane volume sold in a
twelve month period.
The carrying amount of all hedging financial instruments at June 30, 1999
was $0.3 million and was 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 June 30, 1999 Estimated Useful Lives
------------------ ------------- ----------------------
<S> <C> <C> <C>
Land $ 4,635 $ 8,227
Buildings and leasehold
improvements 10,313 20,583 4 - 30 years
Fleet and other equipment 16,918 33,437 3 - 30 years
Tanks and equipment 102,493 106,594 8 - 30 years
Furniture and fixtures 2,833 13,695 5 - 12 years
-------- --------
Total 137,192 182,536
Less accumulated depreciation 26,930 34,178
-------- --------
Total $110,262 $148,358
======== ========
</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 June 30, 1999 Useful Lives
--------------- ------------------------------------ --------------
(Propane) (Propane) (Heating Oil) Total
<S> <C> <C> <C> <C> <C>
Goodwill $25,690 $25,690 $175,615 $201,305 25 years
Covenants not to compete 2,341 2,361 - 2,361 5 years
Customer lists 34,028 34,599 94,633 129,232 10 - 15 years
Deferred charges 2,907 3,104 2,742 5,846 6 - 14 years
------- ------- -------- --------
Total intangibles 64,966 65,754 272,990 338,744
Less accumulated amortization 13,568 16,564 4,159 20,723
------- ------- -------- --------
Net intangibles 51,398 49,190 268,831 318,021
Other assets - 90 682 772
------- ------- -------- --------
Intangibles and other assets $51,398 $49,280 $269,513 $318,793
======= ======= ======== ========
</TABLE>
The table below summarizes the current allocation by the Partnership of the
excess of purchase price over book value related to the acquisition of Petro.
The allocation of the purchase price was 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 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 the Partnership (21,864)
Current liabilities 79,792
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 248,973
---------
Total value assigned to intangibles and other assets $ 269,795
=========
Consisting of:
Customer lists $ 94,000
Goodwill 175,080
Other assets 715
---------
Total $ 269,795
=========
</TABLE>
(1) Includes fair market value adjustment of $13.4 million.
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 the nine months ended June 30, 1999, the Partnership acquired one
unaffiliated retail propane dealer with an aggregate cost of $1.2 million,
and Petro in a four part transaction as described in footnote number 2.
Since the Star Gas / Petro Transaction, the Partnership has also acquired
two unaffiliated heating oil dealers with an aggregate cost of $1.4
million.
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 (prior to the Star Gas / Petro Transaction) 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.
This 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 this General Partner
as part of a tax-free liquidation. This 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 this General Partner
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 this General Partner for additional significant
income tax liabilities which would be reflected in the consolidated federal
income tax return of this entity'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 this General Partner 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) Nine Months Ended June 30,
------------------------------
1998 1999
-------------- --------------
Sales $510,033 $457,106
======== ========
Net income $ 25,732 $ 33,272
======== ========
General Partner's interest in net income
$ 515 $ 665
Limited Partners' interest in net income ======== ========
Basic and Diluted net income per limited
partner unit $ 25,217 $ 32,607
======== ========
$ 1.57 $ 2.03
======== ========
10) Long-Term Debt and Working Capital Borrowings
Long-term debt consisted of the following at the indicated dates:
(in thousands) September 30, June 30,
1998 1999
------------- ----------
Star Gas Propane:
8.04% First Mortgage Notes (a) $ 85,000 $ 85,000
7.17% First Mortgage Notes (a) 11,000 11,000
Acquisition Facility Borrowings (b) 9,000 2,000
Working Capital Facility Borrowings (b) 4,770 1,400
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 (f) - -
Acquisition Notes Payable (g) - 9,739
Subordinated Debentures (h) - 3,022
-------- --------
109,770 269,138
Less current maturities (692) (2,331)
Less bank credit facility borrowings (4,770) (1,400)
-------- --------
Total $104,308 $265,407
======== ========
(a) In December 1995, the General Partner at that time 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 Star Gas Propane. In January 1998, Star Gas Propane issued
an additional $11.0 of First Mortgage Notes with an annual interest rate of
7.17%. Star Gas Propane's obligations under the First Mortgage Note
Agreements are secured, on an equal basis with Star Gas Propane'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 Star Gas Propane.
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 Propane Bank Credit Facilities consist of a $25.0 million
Acquisition Facility and a $12.0 million Working Capital Facility. At June
30, 1999 $2.0 million and $1.4 million was borrowed under the Acquisition
Facility and Working Capital Facility respectively. The agreement
governing the Bank Credit Facilities contains covenants and default
provisions generally similar to those contained in the First Mortgage Note
Agreements. 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, 2001, but may be extended
annually thereafter with the consent of the banks. Borrowings under the
Acquisition Facility will revolve until September 30, 2000, after which
time any outstanding loans thereunder, will amortize quarterly in equal
principal payments with a final payment due on September 30, 2003.
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. At June 30, 1999 no
amount was outstanding under the working capital facility, $9.5 million of
the insurance letter of credit was used, and $9.2 million of the
acquisition facility was outstanding in the form of letter of credits (see
footnote g below). 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 $9.2
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 June 30, 1999, the maturities during fiscal years ending September 30
are set forth in the following table:
(in thousands)
1999 $ 146
2000 12,914
2001 20,796
2002 25,575
2003 54,136
Thereafter 155,571
--------
$269,138
========
As of June 30, 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
================= ===================
<CAPTION>
Twelve Months Ended December 31,
----------------------------------------
Funded Status 1997 1998
- ------------- ------------------ -----------------
<S> <C> <C>
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, Star Gas
Corporation was replaced as the General Partner by Star Gas LLC.
16) Subsequent Events
Cash Distribution
On July 23, 1999 the Partnership announced that it would pay a cash
distribution of $0.575 per common unit for the three months ended June 30,
1999. The distribution is payable on August 13, 1999 to holders of record
as of August 3, 1999.
Acquisitions
On August 4, 1999 the Partnership acquired McBride Propane in Flint,
Michigan with annual propane gallons of 2.8 million.
On August 10, 1999 the Partnership signed a purchase agreement to acquire a
retail propane distributor located in its midwest operating area with sales
of 7.0 million gallons of propane annually. The consummation of this
transaction is subject to finalization of due diligence, financing and
other normal closing conditions.
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 nine month periods ended June 30,
1999 include the Petro acquisition from March 26, 1999. Refer to footnote 2 of
the condensed consolidated financial statements for a description of the Star
Gas / Petro 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.
Also, the propane and heating oil industries are seasonal in nature with peak
activity occurring during the winter months. Since Petro was acquired after the
heating season, the results for the three and nine months ended June 30, 1999
included anticipated third fiscal quarter losses but do not include the profits
from the heating season. Accordingly, results of operations for the periods
presented are not indicative of the results to be expected for a full year.
THREE MONTHS ENDED JUNE 30, 1999
COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
- --------------------------------------------
Volume
For the three months ended June 30, 1999, retail volume of propane and home
heating oil increased 44.7 million gallons to 56.9 million gallons, as compared
to 12.2 million gallons for the three months ended June 30, 1998. This increase
was due to 43.8 million gallons provided by the March 26, 1999 acquisition of
Petro, the heating oil segment, and a 0.9 million gallon increase in the propane
segment. The 0.9 million gallon increase in the propane segment was due to the
additional volume provided by propane acquisitions and internal growth. In the
Partnership's propane operating areas, temperatures were 3.8% warmer than in the
prior year's comparable quarter and 20.5% warmer than normal.
For the three months ended June 30, 1999, wholesale propane volume decreased 3.1
million gallons, or 50.3%, to 3.1 million gallons, as compared to 6.3 million
gallons for the three months ended June 30, 1998. This decrease was due to the
lower summertime pre-season buying demand.
Sales
For the three months ended June 30, 1999, sales increased $62.8 million, or
386.9%, to $79.1 million, as compared to $16.2 million for the three months
ended June 30, 1998. This increase was due to $63.5 million provided by the
home heating oil segment partially offset by a $0.6 million reduction in the
propane segment. Sales decreased in the propane segment due to lower wholesale
volumes and lower selling prices, partially offset by the increased retail
volume.
24
<PAGE>
Cost of Product
For the three months ended June 30, 1999, cost of product increased $22.6
million, or 377.0%, to $28.6 million, as compared to $6.0 million for the three
months ended June 30, 1998. Cost of product relating to heating oil sales
accounted for $23.5 million of this increase. In the propane segment, cost of
product decreased by $0.8 million, as the impact of higher retail volume sales
was largely offset by lower propane supply cost and less wholesale volume.
While both propane selling prices and propane supply costs declined on a per
gallon basis, the decline in selling prices were greater than the decline in
supply costs, which resulted in a decrease in per gallon margins.
Cost of Installation, Service and Appliances
For the three months ended June 30, 1999, cost of installation, service and
appliances increased $23.5 million to $24.0 million, as compared to $0.5 million
for the three months ended June 30, 1998. This increase was almost entirely due
to the inclusion of $23.3 million of expenses relating to the heating oil
segment's cost of installation and service.
Delivery and Branch Expenses
For the three months ended June 30, 1999, delivery and branch expenses increased
$23.6 million, or 276.2%, to $32.1 million, as compared to $8.5 million for the
three months ended June 30, 1998. Delivery and branch expenses at the heating
oil segment accounted for $22.6 million of this change. The $1.0 million
increase in operating expenses for the propane segment was due to additional
operating cost of acquired propane companies and marketing expenses relating to
the propane segment's tank set program, which has increased same store
residential volume by approximately 4.0%.
Depreciation and Amortization Expenses
For the three months ended June 30, 1999, depreciation and amortization expenses
increased $5.6 million, or 194.9%, to $8.5 million, as compared to $2.9 million
for the three months ended June 30, 1998. This increase was largely due to $5.4
million of depreciation and amortization expenses for the heating oil segment
with the difference attributable to the impact of propane acquisitions and other
fixed asset additions.
General and Administrative Expenses
For the three months ended June 30, 1999, general and administrative expenses
increased $2.5 million, or 154.1%, to $4.1 million, as compared to $1.6 million
for the three months ended June 30, 1998. The increase was primarily due to the
inclusion of $2.4 million of the heating oil segment's general and
administrative expenses.
Interest Expense, net
For the three months ended June 30, 1999, net interest expense increased $3.3
million, or 178.7%, to $5.2 million, as compared to $1.9 million for the three
months ended June 30, 1998. This change was primarily due to $3.3 million of
interest expense incurred by the heating oil segment.
25
<PAGE>
Income Tax Expense (Benefit)
For the three months ended June 30, 1999, the income tax benefit was $5.4
million, as compared to an income tax expense of $0.01 million for the three
months ended June 30, 1998. This change was due to the heating oil segment's
corporate net operating loss carryforwards, which generated $5.4 million in
deferred tax benefits offsetting in part the deferred tax liability.
Net Loss
For the three months ended June 30, 1999, net loss increased $13.0 million to a
loss of $18.2 million, as compared to a net loss of $5.2 million for the three
months ended June 30, 1998. The anticipated increase in the net loss was
largely the result of the inclusion of the heating oil segment's seasonally
related loss of $11.8 million and $1.2 million less net income in the propane
segment due to lower wholesale volumes, an increase in marketing expenses and
lower per gallon propane margins.
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) decreased $9.3 million, to a loss of $9.8
million, as compared to a loss of $0.4 million for the three months ended June
30, 1998. This change was due to the seasonally related EBITDA loss of $8.3
million incurred by the heating oil segment. In addition, the EBITDA loss in
the propane division increased by $1.0 million due to lower wholesale volume,
additional marketing expenses, and lower per gallon propane margins associated
with the propane division's successful tank set program. 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>
NINE MONTHS ENDED JUNE 30, 1999
COMPARED TO NINE MONTHS ENDED JUNE 30, 1998
- -------------------------------------------
Volume
For the nine months ended June 30, 1999, retail volume of propane and heating
oil increased 52.0 million gallons, or 61.3%, to 136.8 million gallons, as
compared to 84.8 million gallons for the nine months ended June 30, 1998. This
increase was due to 51.9 million gallons of additional volume provided by the
heating oil segment from March 26, 1999 to June 30, 1999. For the period,
retail propane was 84.9 million gallons, 0.1 million gallons less than the prior
year's comparable period. While retail propane volume increased by 6.6 million
gallons due to acquisitions, internal growth and slightly colder temperatures,
these positive influences were offset by a 6.5 million decrease in agricultural
volume. 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 nine months ending June 30, 1999, were 1.4% colder
than in the prior year's comparable period and 10.8% warmer than normal.
For the nine months ended June 30 1999, wholesale propane volume decreased by
2.0 million gallons, or 8.9%, to 20.2 million gallons, as compared to 22.1
million gallons for the nine months ended June 30, 1998. This decrease was due
to the lower summertime pre-season buying demand.
Sales
For the nine months ended June 30, 1999, sales increased $65.5 million, or
68.2%, to $161.4 million, as compared to $96.0 million for the nine months ended
June 30, 1998. This increase was attributable to $71.6 million of additional
sales provided by the heating oil segment, which were partially offset by a $6.1
million decline in the propane segment. Propane sales declined due to lower
agricultural sales and lower selling prices in response to a decline in 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 nine months ended June 30, 1999, cost of product increased $16.7
million, or 39.9%, to $58.5 million, as compared to $41.8 million for the nine
months ended June 30, 1998. This increase was due to $27.2 million of costs
attributable to the heating oil segment, partially offset by lower propane
supply cost of $10.5 million. 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 nine months ended June 30, 1999, cost of installation, service and
appliances increased $24.7 million, to $26.7 million, as compared to $1.9
million for the nine months ended June 30, 1998. This increase was primarily
due to $24.3 million of costs relating to the heating oil segment.
Delivery and Branch Expenses
For the nine months ended June 30, 1999, delivery and branch expenses increased
$26.2 million, or 92.5%, to $54.4 million, as compared to $28.3 million for the
nine months ended June 30, 1998. This increase was primarily due to the
inclusion of $23.7 million of heating oil operating costs. In addition, propane
operating expenses increased by $1.4 million due to $0.6 million of costs
associated with the segment's marketing initiatives and normal expense increases
of 2.8% or $0.8 million.
27
<PAGE>
Depreciation and Amortization
For the nine months ended June 30, 1999, depreciation and amortization expenses
increased $6.0 million, or 70.3%, to $14.5 million, as compared to $8.5 million
for the nine months ended June 30, 1998. This increase was primarily due to
$5.4 million of heating oil segment depreciation and amortization with the
remainder attributable to the impact of propane acquisitions and other fixed
asset additions.
General and Administrative Expenses
For the nine months ended June 30, 1999, general and administrative expenses
increased $2.8 million, or 63.5%, to $7.2 million, as compared to $4.4 million
for the nine months ended June 30, 1998. This increase was primarily due to the
inclusion of $2.6 million of heating oil general and administrative expenses.
Interest Expense, net
For the nine months ended June 30, 1999, net interest expense increased $3.9
million, or 67.3%, to $9.8 million, as compared to $5.8 million for the nine
months ended June 30, 1998. This change was primarily due to $3.5 million of
interest expense at the heating oil segment and an increase in borrowings
associated with propane acquisitions.
Income Tax Expense (Benefit)
For the nine months ended June 30, 1999, the income tax benefit was $5.3 million
as compared to an income tax expense of $0.02 million for the nine months ended
June 30, 1998. This change was due to the heating oil segment's corporate net
operating loss carryforwards, which generated $5.4 million in deferred tax
benefits offsetting in part the deferred tax liability.
Net Income
For the nine months ended June 30, 1999, the net loss was $4.6 million, as
compared to net income of $4.8 million for the nine months ended June 30, 1998.
This change was due to the $9.8 million seasonal related net loss from the
heating oil segment, partially offset by $0.4 million of additional net income
from the propane segment primarily due to acquisitions.
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) decreased $4.9 million, or 25.1%, to $14.6
million for the nine months ended June 30, 1999, as compared to $19.3 million
for the prior year's comparable period. This decrease was due to the seasonally
related EBITDA loss of $6.2 million incurred by the heating oil segment,
partially offset by $1.3 million of additional propane segment EBITDA. This
increase in the propane segment was attributable to the impact of acquisitions,
1.4% colder weather conditions and higher per gallon propane gross profit
margins. 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 9.0
million common units (including 230,000 overallotment common units exercised in
April 1999). The net proceeds from the offering, net of underwriter's
discounts, commissions and offering expenses was $118.8 million. These funds,
along with the net proceeds from Petro's $87.6 million concurrent private debt
placement, totaled $206.4 million. To effect the Star Gas / Petro Transaction,
these funds were used to repay $193.9 million of Petro's debt, to redeem $11.7
million of Petro's preferred stock, and to pay $0.6 million in transactional
fees.
For the nine months ended June 30, 1999, net cash provided by operating
activities was $34.0 million. This amount 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 $52.9 million. Such funds were utilized for
capital expenditures of $4.9 million, acquisitions of $2.6 million, net credit
facility repayments of $3.4 million, acquisition facility repayments of $7.0
million, non-Star Gas / Petro Transaction related debt repayments of $3.3
million, and Partnership distributions of $12.0 million. As a result of the
above activity, the Partnership's cash increased by $19.7 million.
The Partnership's cash requirements for the remainder of fiscal 1999 include
maintenance capital expenditures of approximately $1.5 million. In addition,
the Partnership plans to pay cash distributions of $7.6 million and conclude its
Year 2000 compliance expenditures of $0.2 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. The
Partnership also plans to continue with the acquisition approach of its business
strategy by pursuing strategic acquisitions, and to prudently fund such
acquisitions through a combination of internally generated cash, debt and
equity.
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 $885,000 to make its
computer systems Year 2000 compliant and to upgrade its internal messaging
system. Through June 30, 1999 the Partnership has incurred approximately
$645,000 in Year 2000 compliance related expenses for applications and hardware,
and it expects to incur the remaining $240,000 through the summer of 1999 for
additional applications and hardware.
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 all fiscal
quarters for all fiscal years beginning after June 15, 2000. 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 June 30, 1999, the Partnership had outstanding borrowings of approximately
$3.4 million under its Bank Credit 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 June 30, 1999, the potential unrealized gain on the
Company's hedging activity would be increased by $2.6 million to a gain of $3.1
million; and conversely a hypothetical ten percent decrease would decrease the
unrealized gain by $2.6 to a loss of $2.2 million.
31
<PAGE>
PART II OTHER INFORMATION
-------------------------
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits Included Within:
-------------------------
(27) Financial Data Schedule
10.1 Seventh amendment dated June 18, 1999 to the Credit Agreement
dated December 13, 1995, between Star Gas Propane, L.P. and
BankBoston, N.A. and NationsBank, N.A.
32
<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 August 11, 1999
---------------- Star Gas LLC
George Leibowitz (Principal Financial Officer)
/s/ James J. Bottiglieri Vice President August 11, 1999
--------------------- Star Gas LLC
James J. Bottiglieri
33
<PAGE>
Exhibit 10.1
EXECUTION COPY
SEVENTH AMENDMENT dated as of June 18, 1999 (this
"Seventh Amendment"), to the Credit Agreement dated as
-----------------
of December 13, 1995 (as amended prior to the date
hereof, the "Credit Agreement"), among Star Gas Propane,
----------------
L.P., a Delaware limited partnership (the "Borrower"),
--------
the lenders party thereto, The First National Bank of
Boston (now known as BankBoston, N.A.), as
Administrative Agent (the "Administrative Agent"), and
--------------------
NationsBank, N.A., as Documentation Agent (the
"Documentation Agent", and together with the
-------------------
Administrative Agent, the "Agents").
------
The Borrower has requested the Agents and the Lenders to make certain
changes to the Credit Agreement. The parties hereto have agreed, subject to the
terms and conditions hereof, to amend the Credit Agreement as provided herein.
Capitalized terms used and not otherwise defined herein shall have the
meanings assigned to such terms in the Credit Agreement (the Credit Agreement,
as amended by, and together with, this Seventh Amendment, and as hereinafter
amended, modified, extended or restated from time to time, being called the
"Amended Agreement").
-----------------
Accordingly, the parties hereto hereby agree as follows:
SECTION 1.01. Amendments to Section 1.01. (a) The definition of Tranche
--------------------------
A Maturity Date in Section 1.01 of the Credit Agreement is hereby deleted in its
entirety and the following is substituted in lieu thereof:
""Tranche A Maturity Date" shall mean June 30, 2001."
-----------------------
(b) The definition of Tranche B Conversion Date in Section 1.01 of the
Credit Agreement is hereby deleted in its entirety and the following is
substituted in lieu thereof:
""Tranche B Conversation Date" shall mean September 30, 2000."
---------------------------
(c) The definition of Tranche B Maturity Date in Section 1.01 of the
Credit Agreement is hereby deleted in its entirety and the following is
substituted in lieu thereof:
""Tranche B Maturity Date" shall mean September 30, 2003."
-----------------------
SECTION 1.02. Amendment to Section 2.11(c). Section 2.11(c) of the
----------------------------
Credit Agreement is hereby deleted in its entirety and the following is hereby
substituted in lieu thereof:
1
<PAGE>
last day of every third calendar month thereafter through September 30,
2003 (the due date of each such installment being called a "Tranche B
---------
Repayment Date"). The amount of any such installment payable on a Tranche B
--------------
Repayment Date (other than September 30, 2003) shall be the lesser of (x)
$2,000,000 or (y) the amount, if any, necessary (after giving effect to any
reductions on account of the expiration after the Tranche B Conversion Date
of any Tranche B Letters of Credit) to reduce the sum of (i) the aggregate
principal amount of the Tranche B Term Loans outstanding immediately after
the Tranche B Conversion Date and (ii) the Tranche B Letter of Credit
Exposure outstanding immediately after the Tranche B Conversion Date by an
aggregate percentage of such sum equal to the percentage set forth opposite
such Repayment Date below:
<TABLE>
<S> <C>
December 31, 2000 69.23%
March 31, 2001 76.92%
June 30, 2001 84.62%
September 30, 2001 92.31%
December 31, 2001 100.00%
March 31, 2002 100.00%
June 30, 2002 100.00%
September 30, 2002 100.00%
December 31, 2002 100.00%
March 31, 2003 100.00%
June 30, 2003 100.00%
September 30, 2003 100.00%
</TABLE>
On the Tranche B Repayment Date that is September 30, 2003, Borrower shall
repay the remaining principal and interest owing on all outstanding Tranche
B Term Loans and fully cash collateralize any then existing Tranche B
Letter of Credit Exposure. All payments under this paragraph (c) shall be
applied (I) first, to repay any outstanding Tranche B Term Loans and (II)
-----
second, after the Tranche B Term Loans have been paid in full, to reduce
------
the Tranche B Letter of Credit Exposure. Any such payments so applied to
reduce the Tranche B Letter of Credit Exposure shall be deposited with the
Administrative Agent pursuant to the Cash Collateral Agreement as provided
in Section 2.21(k)."
SECTION 1.03 Amendment to Section 4.03(a). Section 4.03(a) of the Credit
----------------------------
Agreement is hereby deleted in its entirety and the following is substituted in
lieu thereof:
"(a) At the time of and immediately after any Tranche B Revolving
Credit Borrowing made or any Tranche B Letter of Credit issued (i) on or
before June 30, 1999, the Leverage Ratio as of the date of such Borrowing
or issuance (after giving effect to the acquisition or Growth-Related
capital Expenditure for which such Borrowing or Letter of credit is being
used) shall be no greater than 5.00:1.00, (ii) after June 30, 1999 and on
or before September 30, 1999, the Leverage Ratio as of the date of such
Borrowing or issuance (after giving effect to the acquisition or Growth-
Related Capital
2
<PAGE>
Expenditure for which such Borrowing or Letter of Credit is being used)
shall be no greater than 5.25:1.00, (iii) after September 30, 1999 and on
or before November 29, 1999, the Leverage Ratio as of the date of such
Borrowing or issuance (after giving effect to the acquisition or Growth-
Related Capital Expenditure for which such Borrowing or Letter of Credit is
being used) shall be no greater than 5.25:1.00, (iv) after November 29,
1999 and on or before December 30, 1999, the Leverage Ratio as of the date
of such Borrowing or issuance (after giving effect to the acquisition or
Growth-Related Capital Expenditure for which such Borrowing or Letter of
Credit is being used) shall be no greater than 4.90:1.00 and (v) after
December 30, 1999, the Leverage Ratio as of the date of such Borrowing or
issuance (after giving effect to the acquisition or Growth-Related Capital
Expenditure for which such Borrowing or Letter of Credit is being used)
shall be no greater than 4.50:1.00; and, in the case of each such Borrowing
or issuance of each such Letter of Credit, the Borrower shall have prepared
and furnished to the Agents prior to such Borrowing or issuance pro forma
financial statements demonstrating the fulfillment of such condition to the
satisfaction of the Agents. For purposes of calculating the Leverage Ratio
as required by this Section 4.03(a), Consolidated Cash Flow for the
Reference Period shall mean the greater of (A) Consolidated Cash Flow for
the most recent period of four consecutive fiscal quarters prior to the
date of determination and (B) 50% of Consolidated Cash Flow for the most
recent period of eight consecutive fiscal quarters prior to the date of
determination."
SECTION 1.04. Amendment to Section 6.31(a). Section 6.31(a) of the Credit
----------------------------
Agreement is hereby deleted in its entirety and the following is hereby
substituted in lieu thereof:
"(a) The Borrower will not permit the ratio on any day (the "date of
determination") of (i) Total Funded Debt as of the last day of the
Reference Period with respect to such date of determination to (ii)
Consolidated Cash Flow for such Reference Period to be greater than the
ratio set forth below opposite the calendar period during which such date
of determination occurs:
<TABLE>
<CAPTION>
Calendar Period Ratio
--------------- -----
<S> <C>
January 1, 1996 through 5.00:1.00
June 30, 1997
July 1, 1997 through 4.75:1.00
September 30, 1997
October 1, 1997 through 4.95:1.00
December 31, 1997
January 1, 1998 through 5.00:1.00
September 30, 1998
The period ending 5.40:1.00
December 31, 1998
January 1, 1999 through 5.00:1.00
June 30, 1999
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
July 1, 1999 through 5.25:1.00
September 30, 1999
October 1, 1999 through 5.25:1.00
November 29, 1999
November 30, 1999 through 4.90:1.00
December 30, 1999
December 31, 1999 and thereafter 4.50:1.00"
</TABLE>
SECTION 1.05. Amendment to Section 9.01. Section 9.01(c) of the Credit
-------------------------
Agreement is hereby deleted in its entirety and the following is hereby
substituted in lieu thereof:
"(c) if to the Documentation Agent, to it at Three Allen Center, 333
Clay Street, Suite 4550, Houston, Texas 77002-4103, Attention of Daryl
Patterson (Telecopy no. (713) 651-4808), with a copy to McGuire Woods
Battle & Boothe LLP at NationsBank Corporate Center, 100 North Tryon
Street, Suite 2900, Charlotte, NC 28202-4011, Attention of Marvin L. Rogers
(Telecopy No. (704) 373-8935); and "
SECTION 1.06. Representations and Warranties. The Borrower hereby
------------------------------
represents and warrants to each of the Agents and the Lenders, as follows:
(a) The representations and warranties set forth in Article III of the
Amended Agreement, and in each other Loan Document, are true and correct in
all material respects on and as of the date hereof and on and as of the
Seventh Amendment Effective Date (as hereinafter defined) with the same
effect as if made on and as of the date hereof or the Seventh Amendment
Effective Date, as the case may be, except to the extent such
representations and warranties expressly relate solely to an earlier date.
(b) Each of the Borrower and the Subsidiaries is in compliance with
all the terms and conditions of the Amended Agreement and the other Loan
Documents on its part to be observed or performed and no Default or Event
of Default has occurred or is continuing.
(c) The execution, delivery and performance by the Borrower of this
Seventh Amendment have been duly authorized by the Borrower.
(d) This Seventh Amendment constitutes the legal, valid and binding
obligation of the Borrower, enforceable against it in accordance with its
terms.
(e) The execution, delivery and performance by the Borrower of this
Seventh Amendment (i) will not violate (A) any provision of law, statute,
rule or regulation, or of the agreement of limited partnership of the
Borrower, (B) any order of
4
<PAGE>
any Governmental Authority or (C) any provision of any indenture, agreement
or other instrument to which the Borrower is a party or by which it or any
of its property may be bound and (ii) do not require any consents under,
result in a breach of or constitute (with notice or lapse of time or both)
a default or give rise to increased, additional, accelerated or guaranteed
rights of any Person under any such indenture, agreement or other
instrument.
SECTION 1.07. Effectiveness. This Seventh Amendment shall become effective
-------------
only upon satisfaction of the following conditions precedent (the first date
upon which each such condition has been satisfied being herein called the
"Seventh Amendment Effective Date"):
--------------------------------
(a) the Administrative Agent shall have received duly executed
counterparts of this Seventh Amendment which, when taken together,
bear the authorized signatures of the Borrower and the Required
Lenders.
(b) The Agents shall be satisfied that the representations and
warranties set forth in Section 1.06 are true and correct on and as of
the Seventh Amendment Effective Date.
(c) There shall not be any action pending or any judgment, order
or decree in effect which, in the judgment of the Agents or the
Lenders, is likely to restrain, prevent or impose materially adverse
conditions upon performance by the Borrower of its obligations under
the Amended Agreement.
(d) The Agents shall have received such other documents, legal
opinions, instruments and certificates relating to this Seventh
Amendment as they shall reasonably request and such other documents,
legal opinions, instruments and certificates shall be satisfactory in
form and substance to the Agents and the Lenders. All corporate and
other proceedings taken or to be taken in connection with this Seventh
Amendment and all documents incidental thereto, whether or not
referred to herein, shall be satisfactory in form and substance to the
Agents and the Lenders.
(e) The Borrower shall have paid all fees and expenses referred
to in Section 1.09 of this Seventh Amendment.
SECTION 1.08. APPLICABLE LAW. THIS SEVENTH AMENDMENT SHALL BE GOVERNED BY,
--------------
AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, EXCEPT TO
THE EXTENT THAT THE FEDERAL LAWS OF THE UNITED STATES OF AMERICA MAY APPLY.
SECTION 1.09. Expenses. The Borrower shall pay (i) all reasonable out-of-
--------
pocket expenses incurred by the Agents and the Lenders in connection with the
preparation, negotiations execution, delivery and enforcement of this Seventh
Amendment, including, but not limited to, the reasonable fees and disbursements
of counsel and (ii) an amendment fee in the aggregate amount of $231,250 (the
"Amendment Fee"), $138,750 of such Amendment Fee to be paid to BankBoston N.A.
-------------
and $92,500 of such Amendment Fee to be paid to NationsBank, N.A.
5
<PAGE>
SECTION 1.10. Counterparts. This Seventh Amendment may be executed in any
------------
number of counterparts, each of which shall constitute an original but all of
which when taken together shall constitute but one agreement.
SECTION 1.11. Loan Documents. Except as expressly set forth herein, the
--------------
amendments provided herein shall not by implication or otherwise limit,
constitute a waiver of, or otherwise affect the rights and remedies of the
Lenders, the Agents, the Trustee or the other Secured Parties under the Amended
Agreement or any other Loan Document, nor shall they constitute a waiver of any
Default or Event of Default, nor shall they alter, modify, amend or in any way
affect any of the terms, conditions, obligations, covenants or agreements
contained in the Amended Agreement or any other Loan Document. Each of the
amendments provided herein shall apply and be effective only with respect to the
provisions of the Amended Agreement specifically referred to by such amendments.
Except as expressly amended herein, the Amended Agreement and the other Loan
Documents shall continue in full force and effect in accordance with the
provisions thereof. As used in the Amended Agreement, the terms "Agreement",
"herein", "hereinafter", "hereunder", "hereto" and words of similar import shall
mean, from and after the date hereof, the Amended Agreement.
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Seventh Amendment
to be duly executed by duly authorized officers, all as of the date first above
written.
STAR GAS PROPANE, L.P., as Borrower
By: Star Gas Corporation, its General Partner
by__________________________________________
Name:
Title:
BANKBOSTON, N.A.,
as Administrative Agent and as a Lender
by___________________________________________________
Name:
Title:
NATIONSBANK, N.A., as Documentation Agent
and as a Lender
by___________________________________________________
Name:
Title:
7
<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 JUNE 30, 1999
AND CONSOLIDATED STATEMENT OF OPERATIONS FOR THE INTERIM PERIOD OCTOBER 1, 1998
THROUGH JUNE 30, 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> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 20,849
<SECURITIES> 0
<RECEIVABLES> 51,347
<ALLOWANCES> 1,759
<INVENTORY> 14,868
<CURRENT-ASSETS> 94,565
<PP&E> 182,536
<DEPRECIATION> 34,178
<TOTAL-ASSETS> 561,716
<CURRENT-LIABILITIES> 88,682
<BONDS> 265,407
0
0
<COMMON> 165,748
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 561,716
<SALES> 135,925
<TOTAL-REVENUES> 161,430
<CGS> 58,471
<TOTAL-COSTS> 85,122
<OTHER-EXPENSES> 75,941
<LOSS-PROVISION> 343
<INTEREST-EXPENSE> 9,760
<INCOME-PRETAX> (9,928)
<INCOME-TAX> (5,324)
<INCOME-CONTINUING> (4,604)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,604)
<EPS-BASIC> (0.46)
<EPS-DILUTED> (0.46)
</TABLE>
