<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 December 31, 1998
-----------------
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
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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
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(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 February 11, 1999:
Star Gas Partners, L.P. 3,858,999 Common Units
2,396,078 Subordinated Units
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARY
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I FINANCIAL INFORMATION:
Item 1 - Financial Statements
Consolidated Balance Sheets as of September 30, 1998 and
December 31, 1998 3
Consolidated Statements of Operations for the three months
ended December 31, 1997 and December 31, 1998 4
Consolidated Statements of Cash Flows for the three months
ended December 31, 1997 and December 31, 1998 5
Consolidated Statement of Partners' Capital for the three months
ended December 31, 1998 6
Notes to Consolidated Financial Statements 7-10
Item 2 - Management's Discussion and Analysis of Financial
Conditions and Results of Operations 11-15
PART II OTHER INFORMATION:
Item 6 - Exhibits and Reports on Form 8-K 16
Signature 17
</TABLE>
2
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, 1998
1998 (UNAUDITED)
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,115 $ 5,831
Receivables, net of allowance of $252 and
$221, respectively 5,279 9,153
Inventories 10,608 9,898
Prepaid expenses and other current assets 945 632
-------- --------
Total current assets 17,947 25,514
-------- --------
Property and equipment, net 110,262 109,475
Intangibles and other assets, net 51,398 50,414
-------- --------
Total assets $179,607 $185,403
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable $ 3,097 $ 3,608
Bank credit facility borrowings 4,770 10,720
Current maturities of long-term debt 692 1,384
Accrued expenses 2,830 2,500
Accrued interest 485 2,390
Customer credit balances 6,038 4,684
-------- --------
Total current liabilities 17,912 25,286
-------- --------
Long-term debt 104,308 103,616
Other long-term liabilities 40 53
Partners' Capital:
Common unitholders 58,686 57,347
Subordinated unitholder (1,446) (962)
General partner 107 63
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Total Partners' Capital 57,347 56,448
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Total Liabilities and Partners' Capital $179,607 $185,403
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
--------------------------------------------
1997 1998
------------------- -------------------
<S> <C> <C>
Sales $41,844 $30,237
Costs and expenses:
Cost of sales 21,650 11,978
Delivery and branch 10,153 10,295
Depreciation and amortization 2,785 3,008
General and administrative 1,369 1,429
Net (loss) on sales of assets (48) (4)
------- -------
Operating income 5,839 3,523
Interest expense, net 2,086 2,178
Amortization of debt issuance costs 40 45
------- -------
Income before income taxes 3,713 1,300
Income tax expense 6 6
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Net income $ 3,707 $ 1,294
======= =======
General Partner's interest in net income $ 74 $ 26
------- -------
Limited Partners' interest in net income $ 3,633 $ 1,268
======= =======
Basic and diluted net income per Limited
Partner unit $ .66 $ .20
======= =======
Weighted average number of Limited Partner
units outstanding 5,474 6,255
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
---------------------------------------------
1997 1998
------------------- ---------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,707 $ 1,294
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,785 3,008
Amortization of debt issuance costs 40 45
Provision for losses on accounts receivable 110 (18)
Loss on sales of fixed assets 48 4
Changes in operating assets and liabilities net of
Pearl Gas conveyance:
Increase in receivables (6,105) (3,856)
Decrease in inventories 1,143 710
Decrease (increase) in other assets (61) 313
Increase (decrease) in accounts payable (20) 511
Increase in other current and long-term liabilities 333 233
-------- -------
Net cash provided by operating activities 1,980 2,244
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,085) (1,312)
Proceeds from sales of fixed assets 72 39
Acquisition related costs (360) (12)
Cash acquired in conveyance 1,825 --
-------- -------
Net cash used in investing activities (548) (1,285)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Credit facility borrowings 11,060 10,450
Credit facility repayments (11,060) (4,500)
Acquisition facility borrowings 21,000 --
Acquisition facility repayments (10,000) --
Repayment of debt (23,000) --
Distributions (2,958) (2,193)
Proceeds from issuance of Common Units, net 15,745 --
General Partner contribution 344 --
-------- -------
Net cash provided by financing activities 1,131 3,757
-------- -------
Net increase in cash 2,563 4,716
Cash at beginning of period 889 1,115
-------- -------
Cash at end of period $ 3,452 $ 5,831
======== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 337 $ 279
======== =======
Non-cash investing activities:
Acquisitions:
Working capital $ 1,945
Net long-term assets $ 24,522
Assumption of note payable $(23,000)
Non-cash financing activities:
Issuance of Common Units $ (3,399)
Additional General Partner interest $ (68)
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
(IN THOUSANDS, EXCEPT PER UNIT DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
TOTAL
NUMBER OF UNITS GENERAL PARTNERS'
--------------------------
COMMON SUBORDINATED COMMON SUBORDINATED PARTNER CAPITAL
--------- ------------- ------------ -------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance as of September 30, 1998 3,859 2,396 $58,686 $(1,446) $107 $57,347
Net Income 784 484 26 1,294
Distributions ($.55 per unit) (2,123) (70) (2,193)
----- ----- ------- ------- ---- -------
Balance as of December 31, 1998 3,859 2,396 $57,347 $ (962) $ 63 $56,448
===== ===== ======= ======= ==== =======
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1) BASIS OF PRESENTATION
The unaudited consolidated financial statements reflect all
adjustments which are, in the opinion of management, necessary for a fair
statement of the interim periods presented. All adjustments to the
financial statements were of a normal recurring nature.
The propane industry is seasonal in nature because propane is used
primarily for heating in residential and commercial buildings. Therefore,
the results of operations for the periods ended December 31, 1997 and
December 31, 1998 are not necessarily indicative of the results to be
expected for a full year.
Inventories
Inventories are stated at the lower of cost or market and are computed
on a first-in, first-out basis. At the dates indicated, the components of
inventory were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1998
------------- ------------
<S> <C> <C>
Propane gas $ 8,807 $8,186
Appliances and equipment 1,801 1,712
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$10,608 $9,898
======= ======
</TABLE>
2) BASIC AND DILUTED NET INCOME PER LIMITED PARTNER UNIT
Basic net income per Limited Partner Unit is computed by dividing net
income, after deducting the General Partner's 2.0% interest, by the
weighted average number of Common Units and Subordinated Units outstanding.
Diluted net income per Limited Partner Unit reflects the dilutive effect of
the unit option plan.
3) COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Partnership is threatened
with, or is named in, various lawsuits. The Partnership is not a party to
any litigation which individually or in the aggregate could reasonably be
expected to have a material adverse effect on the company.
4) RELATED PARTY TRANSACTIONS
The Partnership has no employees except for certain employees of its
corporate subsidiary, Stellar Propane Service Corporation and is managed by
Star Gas Corporation (the "General Partner") a wholly owned subsidiary of
Petroleum Heat and Power Co., Inc. Pursuant to the Partnership Agreement,
the General Partner is entitled to reimbursement for all direct and
indirect
7
<PAGE>
4) RELATED PARTY TRANSACTIONS (CONTINUED)
expenses incurred or payments it makes on behalf of the Partnership, and
all other necessary or appropriate expenses allocable to the Partnership or
otherwise reasonably incurred by the General Partner in connection with
operating the Partnership's business. Indirect expenses are allocated to
the Partnership on a basis consistent with the type of expense incurred.
For example, services performed by employees of the General Partner or
Petro on behalf of the Partnership are reimbursed on the basis of hours
worked and rent expense is reimbursed on the proportion of the square
footage leased by the Partnership. For the three months ended December 31,
1998 the Partnership reimbursed the General Partner and Petro $5.2 million
representing salary, payroll tax and other compensation paid to the
employees of the General Partner and to Petro for certain corporate
functions such as finance and compliance. In addition, the Partnership
reimbursed Petro $0.2 million relating to the Partnership's share of the
costs incurred by Petro in conducting the operations of a shared branch
location.
5) PROPOSED ACQUISITION OF PETROLEUM HEAT AND POWER CO., INC.
On October 23, 1998, the Partnership and Petro jointly announced that
they have signed a definitive merger agreement pursuant to which Petro
would be acquired by the Partnership and would become a wholly owned
subsidiary of the Partnership (the "Star Gas/Petro transaction"). It is
anticipated that this acquisition will be accounted for using the purchase
method of accounting. It was originally contemplated that this transaction
would be effected through the sale of $120 million of publicly traded high
yield debt and $140 million in additional Common Units. It is currently
contemplated that this transaction will be effected through the private
placement by Petro of $90 million of investment grade debt and the sale of
$170 million in Common Units. In conjunction with this change, it is also
contemplated that the exchange ratio used to calculate the number of
Subordinated Units to be received by Petro shareholders will be modified
from .13064 to .11758. This transaction would be effected through Petro
shareholders exchanging their 26,452,270 shares of Petro Common Stock for
3,244,977 limited and general partnership units of the Partnership which
will be subordinated to the existing Common Units of the Partnership.
The Partnership currently distributes to its partners, on a quarterly
basis, all of its Available Cash, which is generally all of the cash
receipts of the Partnership less all cash disbursements, with a targeted
Minimum Quarterly Distribution ("MQD") of $0.55 per unit, or $2.20 per unit
on an annualized basis. In connection with the Star Gas/Petro transaction,
the Partnership will increase the MQD to $.575 per unit or $2.30 per unit
on an annualized basis. This increase in the MQD reflects the expectation
that the transaction will be accretive to the Partnership. The increase in
the MQD will also serve to raise the threshold needed to end the
subordination period.
Of the 3,244,977 subordinated Partnership units anticipated to be
distributed to Petro shareholders, 2,491,500 will be Senior Subordinated
Units and 753,477 will be Junior Subordinated Units and General Partner
Units. The Senior Subordinated Units will be publicly registered and
tradable (they are expected to be listed on the New York Stock Exchange)
and will be subordinated with respect to distributions to the Partnership's
Common Units.
8
<PAGE>
5) PROPOSED ACQUISITION OF PETROLEUM HEAT AND POWER CO., INC., (CONTINUED)
The Junior Subordinated Units and General Partner Units will not be
registered nor publicly tradable and will be subordinated to both the
Common Units and the Senior Subordinated Units. The Senior Subordinated
Units will be exchanged with holders of Petro's publicly traded Class A
Common Stock and the Junior Subordinated Units and General Partner Units
will be exchanged with individuals that currently own both Petro's Class C
Common Stock and Class A Common Stock. Certain holders of Petro's Class C
Common Stock will also exchange their shares for Senior Subordinated Units.
It is currently contemplated that 21,189,827 shares of Petro Common
Stock will be exchanged for 2,491,500 Senior Subordinated Units of the
Partnership. 5,262,443 shares of Petro Common Stock, held by certain
individuals who currently own Petro Class C Common Stock, including Irik P.
Sevin, Chairman of both Petro and of the General Partner of the Partnership
and other members of a group that currently controls Petro, will be
exchanged for 430,395 Junior Subordinated Units and 323,082 General
Partnership Units which are economically equivalent to Junior Subordinated
Units. The total value of the Senior Subordinated and Junior Subordinated
units issued for Petro Common Stock is $50.9 million. In addition, the
Partnership will pay $7.0 million of transaction expenses.
Pursuant to the subordination provision, distributions on the
Partnership's Senior Subordinated Units may be made only after
distributions of Available Cash on Common Units meet the MQD target.
Distributions on the Partnership's Junior Subordinated Units and General
Partner Units may be made only after distributions of Available Cash on
Common Units and Senior Subordinated Units meet the MQD. The Subordination
Period will generally extend until the Partnership earns and pays its MQD
for three years. As a condition of the Star Gas/Petro transaction, the
current Partnership Agreement will be amended so that no distribution will
be paid on the Senior Subordinated Units, Junior Subordinated Units, or the
General Partner Units except to the extent Available Cash is earned from
operations.
Like many other publicly traded master limited partnerships, the
Partnership Agreement contains a provision which provides the General
Partner with incentive distributions in excess of certain targeted amounts.
Following the Star Gas/Petro transaction, this provision will be modified
so that should there be any such incentive distributions, they will be made
pro rata to the holders of Senior Subordinated Units, Junior Subordinated
Units, and General Partner Units.
In connection with the Star Gas/Petro transaction, the Senior
Subordinated Units, Junior Subordinated Units and General Partnership Units
can earn, pro rata, an aggregate of up to 303,000 additional Senior
Subordinated Units over a five year period for each year that Petro meets
certain financial goals to a maximum of 909,000 additional Senior
Subordinated Units.
Petro has completed an exchange offer agreement with institutional
holders of an aggregate of $233 million or 98% of its public debt and
preferred stock to permit the redemption of such securities at the closing
of the Star Gas/Petro transaction. This agreement allows Petro to redeem
its 9 3/8% Subordinated Debentures, 10 1/8% Subordinated Notes and 12 1/4%
Subordinated Debentures at 100%, 100% and 103.5% of principal amount,
respectively, plus accrued interest and also to redeem its 12 7/8%
Preferred Stock at $23 per share, plus accrued and unpaid dividends.
9
<PAGE>
5) PROPOSED ACQUISITION OF PETROLEUM HEAT AND POWER CO., INC., (CONTINUED)
In consideration for this early redemption right, Petro has agreed to issue
to such holders 3.37 shares of newly issued Petro Junior Convertible
Preferred Stock for each $1,000 in principal amount or liquidation
preference of such securities. Each share of Petro Junior Convertible
Preferred Stock will be exchangeable into .13064 of a Partnership Common
Unit at the conclusion of the Star Gas/Petro transaction representing a
maximum of 102,773 Common Units.
Petro currently has a 40.5% equity interest in the Partnership and the
General Partner is a subsidiary of Petro. Prior to the Transaction, Petro
owns 2,396,078 Subordinated Units and a 2.0% interest in the Partnership or
the equivalent of 127,655 units. As part of the Transaction, the
Subordinated Units and General Partner Interests will be contributed to the
Partnership by Petro in exchange for 102,773 Common Units and 2,002,378
Senior Subordinated Units. The Common Units will be exchanged by Petro
with the holders of Petro Junior Convertible Preferred Stock and the Senior
Subordinated Units ultimately will be exchanged with certain holders of
Petro's Common Stock. After completion of the Star Gas/Petro transaction,
the Petro shareholders will own approximately 20% of the Partnership's
equity through Subordinated Units and General Partner Units. The holders of
the Partnership's Common Units (including an estimated 8.9 million Common
Units that will be sold in the Partnership's proposed $170 million public
offering) will own an aggregate of approximately 80% equity interest in the
Partnership following the completion of the transaction. In connection with
the Star Gas/Petro transaction, the General Partner of the Partnership will
be a newly organized Delaware limited liability company that will be owned
by Irik Sevin, Audrey Sevin and two entities affiliated with Wolfgang
Traber.
A Special Committee of the Board of Directors of the General Partner
acting on behalf of the holders of the Common Units, negotiated the terms
of the Star Gas/Petro transaction. A.G. Edwards & Sons, Inc. was retained
by the Special Committee as independent financial advisor, and has rendered
an opinion that the Star Gas/Petro transaction is fair, from a financial
point of view, to the holders of Common Units.
The completion of the Star Gas/Petro transaction is subject to the
receipt of regulatory approvals, the approval of the Partnership's non-
affiliated Common unitholders and non-affiliated Petro shareholders and
other necessary partnership and corporate approvals.
6) SUBSEQUENT EVENT - CASH DISTRIBUTION
On January 26, 1999 the Partnership announced that it would pay a cash
distribution of $0.55 per common unit and 2.0% general partner interest for
the three months ended December 31, 1998. The distribution is payable on
February 15, 1999 to holders of record as of February 5, 1999. The
Partnership decided not to pay a distribution on its subordinated units.
7) EQUITY OFFERING
In connection with the Petro acquisition, the Partnership filed on
December 3, 1998 a registration statement to sell $136.0 million of
additional Common Units representing limited partner interests. The
Partnership intends to amend this registration statement to increase the
amount raised to $170.0 million.
10
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1998
- ------------------------------------
COMPARED TO THREE MONTHS ENDED DECEMBER 31, 1997
- ------------------------------------------------
OVERVIEW
In analyzing the financial results of the Partnership, the following matters
should be considered.
Propane'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 the customer mix. For example,
sales to residential customers generate higher profit margins than sales to
other customer groups, such as agricultural customers. Accordingly, a change in
customer mix can affect gross margins without necessarily impacting total sales.
Lastly, the propane industry is seasonal in nature with peak activity occurring
during the winter months. Accordingly, results of operations for the periods
presented are not necessarily indicative of the results to be expected for a
full year.
VOLUME
For the three months ended December 31, 1998, retail propane volume decreased
9.2 million gallons, or 23.7%, to 29.4 million gallons, as compared to 38.6
million gallons for the three months ended December 31, 1997. This decline was
due to the impact of abnormal weather conditions, involving both warmer
temperatures and a very dry fall harvest, which caused propane demand for crop
drying to be at its lowest level since 1991. The abnormally warm weather not
only impacted the volume associated with scheduled deliveries, but also resulted
in certain customers delaying their first winter delivery to the second fiscal
quarter. Partially offsetting these weather related impacts on volume sales was
the additional volume provided by acquisitions. In the Partnership's operating
areas, weather was 15.5% warmer than the prior year's comparable quarter and
13.5% warmer than normal.
For the three months ended December 31, 1998, wholesale propane volume declined
by 3.3 million gallons to 6.3 million gallons, as compared to 9.6 million
gallons for the three months ended December 31, 1997. This decline was
primarily due to the above mentioned weather factors.
SALES
Sales declined $11.6 million or 27.7%, to $30.2 million for the three months
ended December 31, 1998, as compared to $41.8 million for the three months ended
December 31, 1997. This decline was attributable to a reduction in wholesale
and retail volume as well as lower selling prices. During the three months
ended December 31, 1998, retail and wholesale selling prices declined versus the
prior year's comparable quarter in response to lower propane supply costs.
11
<PAGE>
COST OF SALES
Cost of sales declined $9.7 million, or 44.7%, to $12.0 million for the three
months ended December 31, 1998, as compared to $21.7 million for the three
months ended December 31, 1997. This decline was due to lower volume sales and
lower propane supply costs. While both selling prices and propane supply costs
declined on a per gallon basis, the decline in selling prices was less than the
decline in propane supply costs. This resulted in an increase in per gallon
margins across all market segments.
DELIVERY AND BRANCH EXPENSES
Delivery and branch expenses increased $0.1 million, or 1.4%, to $10.3 million
for the three months ended December 31, 1998, as compared to $10.2 million for
the three months ended December 31, 1997. While operating costs associated with
acquisitions led to an increase in delivery and branch expenses of $0.5 million,
these costs were mostly offset by a $0.4 million reduction in compensation
expense due to the weather related volume decline.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased $0.2 million to $3.0 million for
the three months ended December 31, 1998, as compared to $2.8 million for the
three months ended December 31, 1997. This increase was primarily due to
additional depreciation and amortization expense associated with acquisitions.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $1.4 million for both the three months
ended December 31, 1998 and the three months ended December 31, 1997.
INTEREST EXPENSE, NET
Interest expense, net increased $0.1 million to $2.2 million for the three
months ended December 31, 1998, as compared to $2.1 million for the three months
ended December 31, 1997. This change was attributable to the increase in long-
term borrowings to finance the fiscal 1998 acquisitions.
NET INCOME
Net income declined $2.4 million to $1.3 million for the three months ended
December 31, 1998, as compared to $3.7 million for the three months ended
December 31, 1997. The decline was due to lower volume sales and increases in
depreciation and interest expense relating 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 $2.2 million to $6.5 million for
the three months ended December 31, 1998, as compared to $8.7 million for the
prior year's comparable quarter. This decline was due to the impact of abnormal
weather conditions.
12
<PAGE>
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION, LESS NET GAIN
(LOSS) ON SALES OF EQUIPMENT (EBITDA) (CONTINUED)
Despite 15.5% warmer weather, but for the impact of lower agricultural volume,
EBITDA would have declined only $0.6 million due to improved gross profit
margins, lower same store operating costs and the additional EBITDA provided by
acquisitions. 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.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended December 31, 1998, net cash provided by operating
activities increased $0.2 million to $2.2 million, as compared to $2.0 million
for the three months ended December 31, 1997. This increase was due to lower
net working capital requirements for inventory, accounts receivable and other
net assets which substantially offset a $2.4 million reduction in operating
income.
Net cash used in investing activities increased $0.8 million to $1.3 million for
the three months ended December 31, 1998, as compared to $0.5 million for the
three months ended December 31, 1997. Cash flows from investing activities for
the three months ended December 1997 were positively impacted by the $1.8
million in cash acquired in the Pearl Gas conveyance. Exclusive of this item,
net cash used in 1998 decreased $1.1 million versus 1997, due primarily to a
lower level of maintenance capital expenditures.
Net cash provided by financing activities increased $2.6 million to $3.7 million
for the three months ending December 1998 versus $1.1 million for the prior
year's comparable quarter due to a net $0.8 million reduction in Partnership
distributions to subordinated unitholders and an increase in working capital
borrowings of $1.8 million.
The Partnership's cash requirements for the remainder of fiscal 1999 include
capital expenditures of approximately $1.5 million, interest payments on its
First Mortgage Notes of $7.6 million and Partnership distributions. Based on
its current cash position, bank credit availability and expected net cash from
operating activities, the Partnership expects to be able to meet all of its
above obligations for fiscal 1999, as well as all of its other current
obligations as they become due.
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.
13
<PAGE>
YEAR 2000 (CONTINUED)
If needed modifications and conversions are not made on a timely basis, the Year
2000 issue could cause interruption in delivering propane 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. Through December 1998, the Partnership estimates that
incremental costs of approximately $0.2 million have been incurred related to
Year 2000 issues and its ongoing information technology upgrade program. The
current estimated cost to complete the upgrade and remediation of non-compliant
systems is expected to be less than $0.4 million.
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
intends to contact all key suppliers and evaluate their Year 2000 readiness. If
it is determined that these parties will not be Year 2000 compliant, the
Partnership will prepare a contingency plan for those suppliers whose non-
compliance could have a material effect on the Partnership's business
activities.
ACCOUNTING PRINCIPLES NOT YET ADOPTED
The Financial Accounting Standards Board (the "FASB") issued Statement of
Financial Accounting Standards SFAS No. 131 - "Disclosure about Segments of an
Enterprise and Related Information." SFAS No. 131 requires disclosures about
segments of an enterprise and related information such as different types of
business activities and economic environments in which a business operates.
This statement is effective for fiscal years beginning after December 15, 1997.
Accordingly, the Partnership will not be required to adopt SFAS No. 131 until
fiscal year end 1999.
14
<PAGE>
ACCOUNTING PRINCIPLES NOT YET ADOPTED (CONTINUED)
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement is effective for fiscal
years beginning after June 15, 1999. SFAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that entities recognize all derivatives as either assets or liabilities and
measure the instruments at fair value. The accounting for changes in fair value
of a derivative depends upon the intended use of such derivative. The
Partnership expects to adopt the provisions of SFAS 133 in first quarter of
fiscal 2000. The Partnership is still evaluating the effects of SFAS 133.
The adoption of these standards is not expected to have a material effect on the
Partnership's financial position or results of operations.
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 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.
15
<PAGE>
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits Included Within:
------------------------
10.16 Fifth Amendment dated January 22, 1999 to the Bank
Credit Agreement
10.17 Form of Severance Agreement between Star Gas
Corporation and Richard F. Ambury
10.18 Form of Severance Agreement between Star Gas
Corporation and David R. Eastin
(27) Financial Data Schedule
(b) Reports on Form 8-K
-------------------
The Partnership filed form 8-K on November 20, 1998 relating to
the acquisition of Petroleum Heat and Power Co., Inc.
16
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf of the undersigned
thereunto duly authorized:
Star Gas Partners, L.P.
By: Star Gas Corporation (General Partner)
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Joseph P. Cavanaugh President February 12, 1999
------------------- Star Gas Corporation
Joseph P. Cavanaugh (Principal Executive Officer)
/s/ Richard F. Ambury Vice President Finance February 12, 1999
------------------- Star Gas Corporation
Richard F. Ambury (Principal Financial & Accounting Officer)
17
<PAGE>
Exhibit 10.16
FIFTH AMENDMENT dated as of January 22, 1999 (this "Fifth
-----
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 Fifth 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. Amendment to Section 6.31. 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:
Calendar Period Ratio
--------------- -----
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
After June 30, 1999 4.50:1.00
<PAGE>
Nothing contained in this amendment to Section 6.31 of the Credit Agreement
is intended to modify the terms of Section 4.03 of the Credit Agreement.
SECTION 1.02. Amendment to Section 9.01. Section 9.01(c) of the Credit
-------------------------
Agreement is hereby deleted in its entirety and the following 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) 347-3838); and
SECTION 1.03. 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 Fifth
Amendment Effective Date (as hereinafter defined) with the same effect as if
made on and as of the date hereof or the Fifth 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
Fifth Amendment have been duly authorized by the Borrower.
(d) This Fifth 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
Fifth 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 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.
<PAGE>
SECTION 1.04. Effectiveness. This Fifth 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 "Fifth
-----
Amendment Effective Date"):
- ------------------------
(a) the Administrative Agent shall have received duly executed
counterparts of this Fifth 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 1.03 are true and correct on and as of the Fifth
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 Fifth 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 Fifth 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 1.06 of this Fifth Amendment.
SECTION 1.05. APPLICABLE LAW. THIS FIFTH 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 1.06. 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 Fifth
Amendment, including, but not limited to, the reasonable fees and disbursements
of counsel and (ii) an amendment fee in the aggregate amount of $50,000 (the
"Amendment Fee"), $30,000 of such Amendment Fee to be paid to BankBoston N.A.
- --------------
and $20,000 of such Amendment Fee to be paid to NationsBank, N.A.
SECTION 1.07. Counterparts. This Fifth 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.
<PAGE>
SECTION 1.08. 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.
IN WITNESS WHEREOF, the parties hereto have caused this Fifth 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:
<PAGE>
Exhibit 10.17
September 24, 1998
Mr. Richard F. Ambury
Vice President - Finance
Star Gas Propane, L.P.
2187 Atlantic Street
Stamford, CT 06902
Dear Rich:
As a condition of your employment with Star Gas Corporation ("Star"), a
wholly-owned subsidiary of Petroleum Heat and Power Co., Inc. ("Petro") we agree
that if your employment is terminated by Star without "cause" or voluntarily by
you within six months after there has been a "change in circumstances" (each a
"Termination") you will be entitled to receive a severance payment equal to 1.25
times your then basic annual salary. The term "cause" means fraud, dishonesty,
illegal conduct or similar malfeasance or the failure to perform your duty in a
professional manner, if such failure continues for a period of ten days after
written notice. For purposes of this agreement, a "change in circumstances"
shall be deemed to have occurred if for any reason other than for "cause" Star
a) demotes employee reducing the employee's title, b) reduces employee's base
salary or potential bonus compensation in a greater percentage than any other
executive at Star, c) materially reduces employee authority or responsibility,
or d) requires employee to change principal location of employee's employment
by more than fifty (50) miles. If your employment is terminated for any other
reason you will receive no severance payment.
However, if a Termination occurs during the period of 12 months following a
"change of control", you will be entitled to receive a severance payment of an
amount equal to 2.5 times your then basic annual salary. The term "change of
control" shall be deemed to occur if at any time the holders of Petro's Class C
Common Stock no longer own in the aggregate, either a) common stock having at
least 51% of the total voting power of all Petro Common stock or b) if the
businesses of Star and Petro are combined, 51% of the voting power of the equity
securities of the ultimate parent of Star Gas Propane, L.P. or, if such ultimate
parent is Star Gas Partners, L.P., the general partner of such ultimate parent.
If you are entitled to a severance payment, it shall be made to you within
15 days of termination.
<PAGE>
Page 2
Richard F. Ambury
September 24, 1998
You agree that you will not at any time, directly or indirectly, disclose
or furnish to any other person, firm or corporation or use for your personal
benefit any information concerning Star's method of conducting or doing
business, its advertising or marketing programs, or its methods of obtaining
customers, or any other confidential information of Star, including, without
limiting the generality of the foregoing, the names of any propane distributors
with which to your knowledge, Star has held any acquisition discussions, or
which, to your knowledge have contacted Star to discuss a potential acquisition
within the period of three years prior to the date of termination of your
employment.
Please indicate your agreement with the foregoing by signing in the space
provided below.
Sincerely,
Star Gas Corporation
By: Star Gas Propane, L.P.
By:____________________________
Joseph P. Cavanaugh
Accepted and Agreed:
____________________________
Richard F. Ambury
Date:_______________________
<PAGE>
Exhibit 10.18
September 24, 1998
Mr. David R. Eastin
Vice President - Operations
Star Gas Propane, L.P.
2187 Atlantic Street
Stamford, CT 06902
Dear David:
As a condition of your employment with Star Gas Corporation ("Star"), a
wholly-owned subsidiary of Petroleum Heat and Power Co., Inc. ("Petro") we agree
that if your employment is terminated by Star without "cause" or voluntarily by
you within six months after there has been a "change in circumstances" (each a
"Termination") you will be entitled to receive a severance payment equal to 1.25
times your then basic annual salary. The term "cause" means fraud, dishonesty,
illegal conduct or similar malfeasance or the failure to perform your duty in a
professional manner, if such failure continues for a period of ten days after
written notice. For purposes of this agreement, a "change in circumstances"
shall be deemed to have occurred if for any reason other than for "cause" Star
a) demotes employee reducing the employee's title, b) reduces employee's base
salary or potential bonus compensation in a greater percentage than any other
executive at Star, c) materially reduces employee authority or responsibility,
or d) requires employee to change principal location of employee's employment
by more than fifty (50) miles. If your employment is terminated for any other
reason you will receive no severance payment.
However, if a Termination occurs during the period of 12 months following a
"change of control", you will be entitled to receive a severance payment of an
amount equal to 2.5 times your then basic annual salary. The term "change of
control" shall be deemed to occur if at any time the holders of Petro's Class C
Common Stock no longer own in the aggregate, either a) common stock having at
least 51% of the total voting power of all Petro Common stock or b) if the
businesses of Star and Petro are combined, 51% of the voting power of the equity
securities of the ultimate parent of Star Gas Propane, L.P. or, if such ultimate
parent is Star Gas Partners, L.P., the general partner of such ultimate parent.
If you are entitled to a severance payment, it shall be made to you within
15 days of termination.
<PAGE>
Page 2
David R. Eastin
September 24, 1998
You agree that you will not at any time, directly or indirectly, disclose
or furnish to any other person, firm or corporation or use for your personal
benefit any information concerning Star's method of conducting or doing
business, its advertising or marketing programs, or its methods of obtaining
customers, or any other confidential information of Star, including, without
limiting the generality of the foregoing, the names of any propane distributors
with which to your knowledge, Star has held any acquisition discussions, or
which, to your knowledge have contacted Star to discuss a potential acquisition
within the period of three years prior to the date of termination of your
employment.
Please indicate your agreement with the foregoing by signing in the space
provided below.
Sincerely,
Star Gas Corporation
By: Star Gas Propane, L.P.
By: ____________________________
Joseph P. Cavanaugh
Accepted and Agreed:
_________________________
David R. Eastin
Date:____________________
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM STAR GAS
PARTNERS, L.P. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998
AND CONSOLIDATED STATEMENT OF OPERATIONS FOR THE INTERIM PERIOD OCTOBER 1, 1998
THROUGH DECEMBER 31, 1998 AND IS QUALIFIEDDD 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> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 5,831
<SECURITIES> 0
<RECEIVABLES> 9,374
<ALLOWANCES> 221
<INVENTORY> 9,898
<CURRENT-ASSETS> 25,514
<PP&E> 138,438
<DEPRECIATION> 28,963
<TOTAL-ASSETS> 185,403
<CURRENT-LIABILITIES> 25,286
<BONDS> 103,616
0
0
<COMMON> 56,385
<OTHER-SE> 63
<TOTAL-LIABILITY-AND-EQUITY> 185,403
<SALES> 28,807
<TOTAL-REVENUES> 30,237
<CGS> 11,978
<TOTAL-COSTS> 11,739
<OTHER-EXPENSES> 3,050
<LOSS-PROVISION> (15)
<INTEREST-EXPENSE> 2,185
<INCOME-PRETAX> 1,300
<INCOME-TAX> 6
<INCOME-CONTINUING> 1,294
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,294
<EPS-PRIMARY> .20
<EPS-DILUTED> .20
</TABLE>
