<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, 2000
-------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number: 33-98490
---------
STAR GAS PARTNERS, L.P.
-----------------------
(Exact name of registrant as specified in its charter)
Delaware 06-1437793
-------- ----------
(State or other jurisdiction (I.R.S. Employer
of 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 issuer's classes of common
stock, as of July 28, 2000:
16,044,967 Common Units
2,578,797 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>
Part I Financial Information Page
----
<S> <C>
Item 1 - Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 1999 and June 30, 2000 3
Condensed Consolidated Statements of Operations for the
Three months ended June 30, 1999 and June 30, 2000 and for the
Nine months ended June 30, 1999 and June 30, 2000 4
Condensed Consolidated Statement of Partners' Capital for the nine months ended
June 30, 2000 5
Condensed Consolidated Statements of Cash Flows for the nine months ended
June 30, 1999 and June 30, 2000 6
Notes to Condensed Consolidated Financial Statements 7-19
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 20-26
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 27
Part II Other Information:
Item 6 - Exhibits and Reports on Form 8-K 27
Signature 28
</TABLE>
2
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
June 30,
September 30, 2000
1999 (unaudited)
------------- ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 4,492 $ 7,649
Receivables, net of allowance of $948 and $2,725 respectively 42,295 79,968
Inventories 26,317 19,521
Prepaid expenses and other current assets 13,764 14,308
-------- --------
Total current assets 86,868 121,446
-------- --------
Property and equipment, net 154,967 166,740
Long-term portion of accounts receivable 5,590 7,138
Intangibles and other assets, net 291,919 312,015
-------- --------
Total assets $539,344 $607,339
======== ========
Liabilities and Partners' Capital
Current liabilities:
Accounts payable $ 12,939 $ 18,089
Bank credit facility borrowings 3,150 12,050
Current maturities of long-term debt 1,391 14,838
Accrued expenses 43,044 39,311
Unearned service contract revenue 14,007 14,333
Customer credit balances 31,094 12,915
-------- --------
Total current liabilities 105,625 111,536
-------- --------
Long-term debt 276,638 302,681
Other long-term liabilities 6,905 6,421
Partners' Capital:
Common unitholders 145,906 175,142
Subordinated unitholders 5,878 12,476
General partner (1,608) (917)
-------- --------
Total Partners' Capital 150,176 186,701
-------- --------
Total Liabilities and Partners' Capital $539,344 $607,339
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Nine Months Ended June 30,
--------------------------- --------------------------
(in thousands, except per unit data) 1999 2000 1999 2000
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Sales:
Product $ 59,022 $104,243 $135,925 $562,795
Installation, service and appliances 20,070 25,920 25,505 75,949
-------- -------- -------- --------
Total sales 79,092 130,163 161,430 638,744
Costs and expenses:
Cost of product 28,642 66,204 58,471 328,038
Cost of installation, service and appliances 24,021 28,552 26,651 88,886
Delivery and branch 32,122 35,410 54,447 120,987
Depreciation and amortization 8,458 8,847 14,489 25,447
General and administrative 4,070 5,073 7,226 14,349
TG&E customer acquisition expense - 932 - 932
Unit compensation expense - 599 - 599
Net gain (loss) on sales of assets (5) 6 (96) 56
-------- -------- -------- --------
Operating income (loss) (18,226) (15,448) 50 59,562
Interest expense, net 5,221 6,608 9,760 19,981
Amortization of debt issuance costs 128 141 218 398
-------- -------- -------- --------
Income (loss) before income taxes
and minority interest (23,575) (22,197) (9,928) 39,183
-------- -------- -------- --------
Minority interest in net loss of TG&E - 251 - 251
Income tax expense (benefit) (5,362) 45 (5,324) 373
-------- -------- -------- --------
Net income (loss) $(18,213) $(21,991) $ (4,604) $ 39,061
======== ======== ======== ========
General Partner's interest in net income (loss) $ (364) $ (374) $ (92) $ 691
-------- -------- -------- --------
Limited Partners' interest in net income (loss) $(17,849) $(21,617) $ (4,512) $ 38,370
======== ======== ======== ========
Basic and diluted net income (loss) per
Limited Partner unit $ (1.11) $ (1.15) $ (0.46) $ 2.13
======== ======== ======== ========
Basic and diluted weighted average number of Limited
Partner units outstanding 16,011 18,872 9,717 18,056
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
(unaudited)
(in thousands, except per unit amounts)
<TABLE>
<CAPTION>
Number of Units
---------------------------------- Total
Senior Junior General Senior Junior General Partners'
Common Sub. Sub. Partner Common Sub. Sub. Partner Capital
------ ---- ---- ------- ------ ---- ---- ------- -------
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of
September 30, 1999 14,378 2,477 345 326 $145,906 $ 5,938 $(60) $(1,608) $150,176
Issuance of Common Units 1,667 22,611 22,611
Issuance of Senior
Subordinated Units 102 599 599
Net income 32,371 5,265 734 691 39,061
Distributions
($1.725 per common unit) (25,746) (25,746)
-----------------------------------------------------------------------------------
Balance as of
June 30, 2000 16,045 2,579 345 326 $175,142 $11,802 $674 $ (917) $186,701
===================================================================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
(in thousands) Nine Months Ended June 30,
---------------------------------
1999 2000
--------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (4,604) $ 39,061
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 14,489 25,447
Amortization of debt issuance cost 218 398
Minority interest in net loss of TG&E - (251)
Unit compensation expense - 599
Provision for losses on accounts receivable 168 1,425
Loss (gain) on sales of assets 96 (56)
Deferred tax benefit (5,368) -
Other (7) (11)
Changes in operating assets and liabilities, net of amounts acquired:
Decrease (increase) in receivables 26,277 (33,700)
Decrease in inventories 9,195 8,580
Increase in other assets (4,444) (946)
Decrease in accounts payable (4,377) (2,802)
Increase (decrease) in other current liabilities 2,313 (23,177)
--------- --------
Net cash provided by operating activities 33,956 14,567
--------- --------
Cash flows from investing activities:
Capital expenditures (4,936) (4,634)
Proceeds from sales of fixed assets 137 360
Cash acquired in acquisitions 18,760 876
Acquisitions (2,581) (49,162)
--------- --------
Net cash provided by (used in) investing activities 11,380 (52,560)
--------- --------
Cash flows from financing activities:
Credit facility borrowings 11,850 75,000
Credit facility repayments (15,220) (69,352)
Acquisition facility borrowings - 49,350
Acquisition facility repayments (7,000) (36,000)
Distributions (12,005) (25,746)
Increase in deferred charges (927) (551)
Proceeds from issuance of Common Units, net 118,824 22,611
Repayment of debt (197,053) (1,239)
Redemption of preferred stock (11,746) -
Proceeds from issuance of debt 87,552 28,029
Other 123 (952)
--------- --------
Net cash provided by (used in) financing activities (25,602) 41,150
--------- --------
Net increase in cash 19,734 3,157
Cash at beginning of period 1,115 4,492
--------- --------
Cash at end of period $ 20,849 $ 7,649
========= ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1) Partnership Organization
Star Gas Partners, L.P. ("Star Gas Partners" or the "Partnership") is a
diversified home energy distributor and services provider, specializing in
heating oil, propane, natural gas and electricity. Star Gas Partners is a
Master Limited Partnership whose 16.0 million common limited partner units
(trading symbol "SGU" representing a 83.1% limited partner interest in Star
Gas Partners) and 2.6 million senior subordinated units (trading symbol
"SGH" representing a 13.4% limited partner interest in Star Gas Partners)
are traded on the New York Stock Exchange. Additional interest in Star Gas
Partners are represented by 0.3 million junior subordinated units
(representing a 1.8% limited partner interest in Star Gas Partners) and 0.3
million general partner units (representing a 1.7% general partner interest
in Star Gas Partners).
Operationally the Partnership is organized as follows:
. Petro Holdings, Inc. ("Petro" or the "heating oil segment"), is the
nation's largest distributor of home heating oil and serves approximately
350,000 customers in the Northeast and Mid-Atlantic. Petro is an indirect
wholly owned subsidiary of Star Gas Propane, L.P.
. Star Gas Propane, L.P., ("Star Gas Propane" or the "propane segment") is a
wholly owned subsidiary of Star Gas Partners. Star Gas Propane markets and
distributes propane gas and related products to more than 190,000
customers in the Midwest and Northeast.
. Total Gas and Electric ("TG&E" or the "natural gas and electric reseller
segment") is an energy reseller that markets natural gas and electricity
to residential homeowners in deregulated energy markets in the Northeast
and Mid-Atlantic states of New York, New Jersey, Pennsylvania and Maryland
and serves approximately 100,000 residential customers. TG&E is a 72.7%
owned subsidiary of the Partnership.
2) Summary of Significant Accounting Policies
Basis of Presentation
The Consolidated Financial Statements for the period October 1, 1998 through
March 25, 1999 include the accounts of Star Gas Partners, L.P., and
subsidiaries, principally Star Gas Propane. Beginning March 26, 1999, the
Consolidated Financial Statements also include the accounts and results of
operations of Petro. Beginning April 7, 2000, the Consolidated Financial
Statements also include the accounts and results of operations of TG&E. The
Partnership consolidates 72.7% of TG&E's fair market value adjusted balance
sheet with a contra amount representing the minority interest not owned by
the Partnership. Revenue and expenses are also consolidated with the
Partnership with a deduction for the net amount allocable to the minority
interest. 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.
7
<PAGE>
2) Summary of Significant Accounting Policies - (continued)
Revenue Recognition
Sales of propane, heating oil, natural gas, electricity and propane/heating
oil equipment are recognized at the time of delivery of the product to the
customer or at the time of sale 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.
Basic and Diluted 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.
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. The Partnership amortizes 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, and are amortized over the respective lives
of the covenants, which are generally five years.
Customer lists are the names and addresses of the acquired company's
patrons. Based on the historical retention experience of these lists, Star
Gas Propane amortizes customer lists on a straight-line method over fifteen
years, Petro amortizes customer lists on a straight-line method over seven
to ten years and TG&E amortizes customer lists on a straight-line method
over ten years.
Deferred charges represent the costs associated with the issuance of debt
instruments and are amortized using the interest method over the lives of
the related debt instruments.
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.
8
<PAGE>
2) Summary of Significant Accounting Policies - (continued)
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 usage 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.
Derivatives and Premiums
The Partnership uses derivatives to hedge the price risk associated with
the products it sells to guaranteed maximum price customers and to some
extent natural gas inventory on hand. The realized gains and losses from
these derivatives are matched with the inventory being hedged and are
included with cost of goods sold. Premiums paid for derivatives are
capitalized and amortized as part of cost of goods sold over the useful
lives of the related instruments.
TG&E Customer Acquisition Expense
TG&E customer acquisition expense represent primarily, payments made to a
third-party direct marketing company for the cost associated with obtaining
new accounts for the Partnership's natural gas and electric reseller
division.
Employee Unit Incentive Plan
The Partnership adopted an employee unit incentive plan to grant certain
employees senior subordinated units of limited partner interest of the
Partnership ("incentive units"), as an incentive for increased efforts
during employment and as an inducement to remain in the service of the
Partnership. Grants of incentive units vest twenty percent immediately,
with the remaining amount vesting over four consecutive installments in
which the Partnership achieves annual targeted distributable cash flow.
The Partnership records an expense for the incentive units granted, which
require no cash contribution, ratably over the vesting period for those
units which are probable of being issued.
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 Partnership'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 partners. Net earnings for
financial statement purposes will differ significantly from taxable income
reportable to partners 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.
9
<PAGE>
2) Summary of Significant Accounting Policies - (continued)
Income Taxes - (continued)
For all corporate subsidiaries of the Partnership excluding TG&E, a
consolidated Federal income tax return is filed. TG&E files a separate
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.
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. Subsequently, the FASB issued SFAS No. 137 which
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.
3) 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 ("MQD") 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 the common units.
The Partnership intends to distribute to the extent there is sufficient
Available Cash, at least a MQD of $0.575 per common unit, or $2.30 per
common 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.
10
<PAGE>
3) Quarterly Distribution of Available Cash - (continued)
In July 2000, the Partnership announced based on its results in fiscal
2000, that in addition to its regular quarterly distribution of $0.575 on
its common units, that it would commence quarterly distributions on its
senior subordinated units at an initial rate of $0.25 per unit.
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.
The subordination period will generally extend until the first day of any
quarter beginning on or after October 1, 2002 that each of the following
three events occur:
(1) distributions of Available Cash from Operating Surplus on the common
units, senior subordinated units, junior subordinated units and general
partner units equal or exceed the sum of the minimum quarterly
distributions on all of the outstanding common units, senior subordinated
units, junior subordinated units and general partner units for each of the
three non-overlapping four-quarter periods immediately preceding that date;
(2) the Adjusted Operating Surplus generated during each of the three
immediately preceding non-overlapping four-quarter periods equaled or
exceeded the sum of the minimum quarterly distributions on all of the
outstanding common units, senior subordinated units, junior subordinated
units and general partner units during those periods on a fully diluted
basis for employee options or other employee incentive compensation. This
includes all outstanding units and all common units issuable upon exercise
of employee options that have, as of the date of determination, already
vested or are scheduled to vest before the end of the quarter immediately
following the quarter for which the determination is made. It also includes
all units that have as of the date of determination been earned by but not
yet issued to our management for incentive compensation; and
(3) there are no arrearages in payment of the minimum quarterly
distribution on the common units.
4) Segment Reporting
In accordance with SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," the Partnership has three reportable
segments, as a retail distributor of heating oil, as a retail distributor
of propane and as a reseller of natural gas and electricity. Management
has chosen to organize the enterprise under these three segments in order
to leverage the expertise it has in each industry, allow each segment to
continue to strengthen its core competencies and provide a clear means for
evaluation of operating results.
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 primarily in the
Northeast and Mid-Atlantic 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 have a significant
impact on the demand for home heating oil.
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, in the Midwest and 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 also have a significant impact on the demand for
propane.
11
<PAGE>
4) Segment Reporting - (continued)
The natural gas and electric reseller segment is primarily engaged in
offering natural gas and electricity to residential consumers in
deregulated energy markets. In deregulated energy markets customers have a
choice in selecting energy suppliers to power and / or heat their homes.
TG&E operates in nine markets in the Northeast/Mid Atlantic states where
competition for energy suppliers range from independent resellers, like
TG&E, to large public utilities.
The following are the statements of operations and balance sheets for each
segment as of and for the periods indicated. The heating oil segment was
consolidated with the propane segment beginning March 26, 1999, and the
electric and natural gas reselling segment was added beginning April 7,
2000. There were no inter-segment sales.
<TABLE>
<CAPTION>
(in thousands) Three Months Ended
-----------------------------------------------------------------------------------
June 30, 1999 June 30, 2000
--------------------------------------- ------------------------------------------
Heating Heating TG (a)
Statement of Operations Oil Propane Consol. Oil Propane &E Consol.
----------------------- --------- -------- --------- --------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales:
Product $ 45,404 $13,618 $ 59,022 $ 72,049 $20,946 $11,248 $104,243
Installation, service,
and appliance 18,056 2,014 20,070 23,253 2,667 - 25,920
-------- ------- -------- -------- ------- ------- --------
Total sales 63,460 15,632 79,092 95,302 23,613 11,248 130,163
Costs and expenses:
Cost of product 23,455 5,187 28,642 45,442 10,595 10,167 66,204
Cost of installation,
service, and appliances 23,316 705 24,021 27,806 746 - 28,552
Delivery and branch 22,583 9,539 32,122 25,011 10,399 - 35,410
Depreciation and
amortization 5,423 3,035 8,458 5,704 2,983 160 8,847
General and
administrative 2,439 1,631 4,070 2,466 1,864 743 5,073
TG&E customer
acquisition expense - - - - - 932 932
Unit compensation expense - - - - - - 599
Net gain (loss) on sales
of assets 2 (7) (5) (6) 12 - 6
-------- ------- -------- -------- ------- ------- --------
Operating (loss) (13,754) (4,472) (18,226) (11,133) (2,962) (754) (15,448)
Interest expense
(income), net 3,261 1,960 5,221 4,072 2,501 35 6,608
Amortization of debt
issuance costs 83 45 128 91 50 - 141
-------- ------- -------- -------- ------- ------- --------
Income (loss) before
income taxes and
minority interest (17,098) (6,477) (23,575) (15,296) (5,513) (789) (22,197)
-------- ------- -------- ------- ------- ------- -------
Minority interest in net
loss of TG&E - - - - - 251 251
Income tax expense (benefit) (5,368) 6 (5,362) 25 17 3 45
-------- ------- -------- -------- ------- ------- --------
Net (loss) $(11,730) $(6,483) $(18,213) $(15,321) $(5,530) $ (541) $(21,991)
======== ======= ======== ======== ======= ======= ========
Capital expenditures $ 1,121 $ 1,464 $ 2,585 $ 740 $ 593 $ 7 $ 1,340
======== ======= ======== ======== ======= ======= ========
</TABLE>
(a) Unit compensation expense has been classified as an expense of Star Gas
Partners and has not been allocated to the three segments.
12
<PAGE>
4) Segment Reporting - (continued)
<TABLE>
<CAPTION>
(in thousands) Nine Months Ended
--------------------------------------------------------------------------
June 30, 1999 June 30, 2000
------------------------------- ---------------------------------------
Heating Heating TG (a)
Statement of Operations Oil Propane Consol. Oil Propane &E Consol.
----------------------- --------- --------- --------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales:
Product $ 53,312 $82,613 $135,925 $436,791 $114,756 $11,248 $562,795
Installation, service,
and appliance 18,281 7,224 25,505 66,479 9,470 - 75,949
-------- ------- -------- -------- -------- ------- --------
Total sales 71,593 89,837 161,430 503,270 124,226 11,248 638,744
Costs and expenses:
Cost of product 27,152 31,319 58,471 259,322 58,549 10,167 328,038
Cost of installation,
service, and appliances 24,290 2,361 26,651 85,879 3,007 88,886
Delivery and branch 23,726 30,721 54,447 87,406 33,581 120,987
Depreciation and 8,918
amortization 5,423 9,066 14,489 16,369 160 25,447
General and 5,537
administrative 2,589 4,637 7,226 8,069 743 14,349
TG&E customer
acquisition expense - - - - - 932 932
Unit compensation expense - - - - - - 599
Net gain (loss) on sales
of assets 2 (98) (96) 8 48 - 56
-------- ------- -------- -------- -------- ------- --------
Operating income (loss) (11,585) 11,635 50 46,233 14,682 (754) 59,562
Interest expense
(income), net 3,486 6,274 9,760 12,982 6,964 35 19,981
Amortization of debt
issuance costs 83 135 218 258 140 - 398
-------- ------- -------- -------- -------- ------- --------
Income (loss) before
income taxes and
minority interest (15,154) 5,226 (9,928) 32,993 7,578 (789) 39,183
-------- ------- -------- -------- -------- ------- --------
Minority interest in net
loss of TG&E - - - - - 251 251
Income tax expense (benefit) (5,343) 19 (5,324) 300 70 3 373
-------- ------- -------- -------- -------- ------- --------
Net income (loss) $ (9,811) $ 5,207 $ (4,604) $ 32,693 $ 7,508 $ (541) $ 39,061
======== ======= ======== ======== ======== ======= ========
Capital expenditures $ 1,121 $ 3,815 $ 4,936 $ 1,752 $ 2,875 $ 7 $ 4,634
======== ======= ======== ======== ======== ======= ========
</TABLE>
(a) Unit compensation expense has been classified as an expense of Star Gas
Partners and has not been allocated to the three segments.
13
<PAGE>
4) Segment Reporting - (continued)
<TABLE>
<CAPTION>
(in thousands) September 30, 1999 June 30, 2000
------------------------------- -----------------------------------------
Heating (1) Heating TG (1)
Balance Sheet Oil Propane Consol. Oil Propane &E Consol.
------------- --------- --------- --------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 4,270 $ 222 $ 4,492 $ 1,294 $ 3,362 $ 86 $ 7,649
Receivables, net 35,960 6,335 42,295 63,797 9,427 6,744 79,968
Inventories 16,498 9,819 26,317 12,048 5,951 1,522 19,521
Prepaid expenses and other
current assets 13,678 1,156 13,764 12,733 2,113 1,823 14,308
-------- -------- -------- -------- -------- ------- --------
Total current assets 70,406 17,532 86,868 89,872 20,853 10,175 121,446
Property and equipment, net 39,849 115,118 154,967 38,861 127,741 138 166,740
Long-term portion of accounts
receivable 5,590 - 5,590 7,138 - - 7,138
Investment in Petro Holdings - 83,233 - - 103,742 - -
Intangibles and other assets, net 236,981 54,938 291,919 238,778 61,817 11,420 312,015
-------- -------- -------- -------- -------- ------- --------
Total assets $352,826 $270,821 $539,344 $374,649 $314,153 $21,733 $607,339
======== ======== ======== ======== ======== ======= ========
Liabilities and
Partners' Heating (1) Heating TG (1)
Capital Oil Propane Consol. Oil Propane &E Consol.
-------- --------- --------- --------- --------- -------- ---------
Current Liabilities:
Accounts payable $ 7,366 $ 5,573 $ 12,939 $ 8,550 $ 3,072 $ 6,917 $ 18,089
Bank credit
facility borrowings - 3,150 3,150 7,000 - 5,050 12,050
Current maturities
of long-term debt 1,391 - 1,391 14,381 457 - 14,838
Accrued expenses
and other current
liabilities 39,012 4,231 43,044 31,260 6,479 1,574 39,311
Due to affiliate - - - - - 144 -
Unearned service
contract revenue 14,007 - 14,007 14,333 - - 14,333
Customer credit
balances 26,657 4,437 31,094 9,422 2,553 940 12,915
-------- -------- -------- -------- -------- ------- --------
Total current
liabilities 88,433 17,391 105,625 84,946 12,561 14,625 111,536
Long-term debt 174,338 102,300 276,638 179,638 123,043 4,000 302,681
Other long-term
liabilities 6,822 92 6,905 6,323 98 - 6,421
Partners' Capital /
Equity Capital 83,233 151,038 150,176 103,742 178,451 3,108 186,701
-------- -------- -------- -------- -------- ------- --------
Total Liabilities
and Partners'
Capital $352,826 $270,821 $539,344 $374,649 $314,153 $21,733 $607,339
======== ======== ======== ======== ======== ======= ========
</TABLE>
(1) The consolidated amounts include the necessary entries to eliminate the
investment in Petro Holdings, Star Gas Propane and TG&E, and at 6/30/00
includes $2,907 of cash held by Star Gas Partners.
14
<PAGE>
5) Inventories
The components of inventory were as follows:
<TABLE>
<CAPTION>
September 30, 1999 June 30, 2000
------------------ -------------
<S> <C> <C>
(in thousands)
Propane gas $ 7,678 $ 3,742
Propane appliances and equipment 2,141 2,209
Fuel oil 9,959 4,989
Fuel oil parts and equipment 6,539 7,059
Natural Gas - 1,522
------- -------
$26,317 $19,521
======= =======
</TABLE>
Propane Gas
Substantially all of the Partnership's propane 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 local
refiners supply most of the propane for the Midwest operations, with spot
purchases from Mont Belvieu, Texas accounting for approximately one-seventh
of the Partnership's total volume of propane purchases. In addition, the
three single largest suppliers in the aggregate account for approximately
one-half of total propane purchases.
Fuel Oil
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.
Natural Gas and Electricity
The Partnership is an independent reseller of natural gas and electricity
to residential homeowners in deregulated markets, through its 72.7%
controlling interest in TG&E. In the markets in which TG&E operates,
natural gas and electricity are available from wholesale natural gas
producers and electricity generating companies. Substantially all of
TG&E's natural gas is purchased from a major Texas wholesaler, with the
balance from regional wholesalers, who transport the natural gas to the
incumbent utility company for TG&E, through purchased or assigned capacity
using existing pipes. Additionally, all of TG&E's electricity is purchased
from a major New York State wholesaler, who transports the electricity to
the incumbent utility company, through scheduled deliveries using existing
electric lines.
The incumbent utility company then delivers the natural gas and electricity
to TG&E customers using existing pipes and electric lines. The incumbent
utility and TG&E coordinate delivery and billing, and also compete to sell
the natural gas and electricity to the ultimate consumer. Generally,
customers pay the incumbent utility a service charge to cover customer
related costs like meter reading, billing, equipment and maintenance.
Customers also pay a separate delivery charge to the incumbent utility for
bringing the natural gas and electricity from the customer's chosen
supplier. The energy service company is then paid by the customer for the
natural gas or electricity that was supplied. In most markets in which
TG&E operates, these charges are itemized on one customer energy bill from
the utility company. In other markets, TG&E directly bills the customer
for the natural gas or electricity supplied.
15
<PAGE>
5) Inventories - (continued)
The Partnership may enter into forward contracts with Mont Belvieu
suppliers, heating oil suppliers, refineries or wholesale natural gas
producers 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 one-third 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 futures contracts, options, and swaps 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
margins for 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.
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. Based upon the above the
Partnership accounts for its derivative activity as hedge transactions.
To hedge a portion of the heating oil gallons anticipated to be sold to its
guaranteed maximum price customers, the heating oil segment at June 30,
2000 had 40.1 million gallons of futures contracts to buy heating oil with
a notional value of $28.4 million and a fair market value of $32.5 million;
30.4 million gallons of futures contracts to sell heating oil with a
notional value of $21.3 million and a fair market value of $24.5 million;
4.2 million gallons of cap contracts to buy heating oil at an agreed upon
cap price with a notional value of $2.9 million and a fair market value of
$3.5 million; 66.2 million gallons of floor contracts to sell heating oil
at an agreed upon floor price with a notional value of $40.8 million and a
fair market value of $52.0 million; and 43.1 million gallons of swap
contracts that establishes a fixed price to buy heating oil at an agreed
upon strike price with a notional value of $28.5 million and a fair market
value of $33.0 million. The contracts expire at various times with no
contract expiring later than June 2001.
At June 30, 2000 the unrealized gains on the heating oil segment's hedging
activity was approximately $6.0 million. The heating oil segment's hedging
activity is designed to help it achieve its planned margins and represents
approximately one-third of the expected total home heating oil volume sold
in a twelve month period.
16
<PAGE>
5) Inventories - (continued)
At June 30, 2000 less than 5% of TG&E's natural gas accounts have a fixed
selling price. To help mitigate fluctuations in the cost of natural gas
and to hedge these fixed price customers TG&E at June 30, 2000 had forward
purchase contracts for 280 thousand dekatherms of natural gas with a
notional value of $0.8 million and a fair market value of $1.2 million; and
360 thousand dekatherm future contracts to sell natural gas at an agreed
upon price with a notional value of $1.6 million and a fair market value of
$1.6 million. The contracts expire at various times with no contract
expiring later than March 2001. At June 30, 2000 the unrealized gain on
TG&E's hedging activity was approximately $0.5 million.
The carrying amount of all hedging financial instruments at June 30, 2000
was $1.7 million and was included in Prepaid Expenses on the 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
counterparty default.
6) Acquisitions
During the nine month period ending June 30, 2000, the Partnership acquired
seven unaffiliated retail heating oil dealers, four unaffiliated retail
propane dealers and a 72.7% controlling interest in an electricity and
natural gas reseller (see footnote 1). The aggregate consideration for
these acquisitions accounted for by the purchase method of accounting was
approximately $49.2 million. 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.
The following table indicates the allocation of the aggregate purchase
price paid for these acquisitions and the respective periods of
amortization assigned:
<TABLE>
<CAPTION>
(in thousands) Useful Lives
------------
<S> <C> <C>
Land $ 1,394 -
Buildings 431 30 years
Furniture and Fixtures 304 10 years
Fleet 3,712 5 - 30 years
Tanks and equipment 11,618 5- 30 years
Customer lists 9,244 7- 15 years
Restrictive covenants 3,380 5 years
Goodwill 21,207 25 years
Inventory 604 -
Working capital (3,467) -
Minority interest 735 -
-------
Total $49,162
=======
</TABLE>
Sales and net income have been included in the Condensed Consolidated
Statements of Operations from the respective dates of acquisition. The
following unaudited pro forma information presents the results of
operations for the nine months ending June 30, 2000 of the Partnership and
the acquisitions previously described, as if the acquisitions had taken
place on October 1, 1999.
(in thousands, except per share data)
<TABLE>
<S> <C>
Sales $682,216
========
Net income $ 40,448
========
General Partner's interest in net income $ 683
========
Limited Partners' interest in net income $ 39,765
========
Basic and Diluted net income per limited partner unit $ 2.10
========
</TABLE>
17
<PAGE>
7) Supplemental Disclosure of Cash Flow Information
<TABLE>
<CAPTION>
(in thousands) Nine Months Ended June 30,
---------------------------------
1999 2000
---- ----
<S> <C> <C>
Cash paid during the period for:
Income taxes $ - $ 3,643
Interest $10,616 $27,490
Non-cash investing activities:
Redemption of preferred stock $(6,858) -
Non-cash financing activities:
Issuance of Common Units $ 6,858 -
</TABLE>
8) Earnings Per Limited Partner Units
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
(in thousands, except per unit data) June 30, June 30,
-------- --------
1999 2000 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic Earnings Per Unit:
------------------------
Net income (loss) $(18,213) $(21,991) $(4,604) $39,061
Less: General Partner's interest in net income (loss) (364) (374) (92) 691
-------- -------- ------- -------
Limited Partner's interest in net income (loss) $(17,849) $(21,617) $(4,512) $38,370
======== ======== ======= =======
Common Units 13,189 16,045 7,169 15,233
Senior Subordinated Units 2,477 2,482 880 2,478
Junior Subordinated Units 345 345 123 345
Subordinated Units - - 1,545 -
-------- -------- ------- -------
Weighted average number of Limited Partner units outstanding 16,011 18,872 9,717 18,056
======== ======== ======= =======
Basic earnings (loss) per unit $ (1.11) $ (1.15) $ (0.46) $ 2.13
======== ======== ======= =======
Diluted Earnings Per Unit:
---------------------------
Effect of dilutive securities $ - $ - $ - $ -
--------- --------- -------- -------
Limited Partner's interest in net income (loss) $(17,849) $(21,617) $ (4,512) $38,370
======== ======== ======= =======
Effect of dilutive securities - - - -
-------- -------- ------- -------
Weighted average number of Limited Partner units outstanding 16,011 18,872 9,717 18,056
======== ======== ======= =======
Diluted earnings (loss) per unit $ (1.11) $ (1.15) $ (0.46) $ 2.13
======== ======== ======= =======
</TABLE>
9) Weather Insurance
The Partnership purchased a weather insurance policy from an independent
insurance company in January 2000 for a one-time premium of approximately
$0.5 million. The purpose of the policy was to limit the negative impact
of warmer than normal weather on the Partnership's operating results for
the months of February and March 2000. The Partnership submitted a notice
of loss in the amount of approximately $1.8 million under the policy in
April 2000. The insurance company, while not disclaiming its obligation,
has not made payments in accordance with the stipulated payment terms.
Attorneys for the Partnership have reviewed the policy and are not aware of
any facts or legal theories that would provide a valid defense to the
Partnership's claim. The Partnership is currently pursuing judicial
remedies to resolve this matter. Amounts that are receivable pursuant to
the policy are recorded as a reduction to operating expenses.
18
<PAGE>
10) Subsequent Events
Cash Distribution
On July 25, 2000 the Partnership announced that it would pay a cash
distribution of $0.575 per Common Unit and $0.25 per Senior Subordinated
Unit for the three months ended June 30, 2000. The distributions will be
paid on August 15, 2000 to holders of record as of August 4, 2000.
19
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND 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
home heating oil, propane, electricity and natural gas 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 Financial Condition and Results of Operations" 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.
Important factors that could cause actual results to differ materially from the
Partnership's expectations ("Cautionary Statements") are disclosed in this
Report, including without limitation and in conjunction with the forward-looking
statements included in this report. All subsequent written and oral forward-
looking statements attributable to the Partnership or persons acting on its
behalf are expressly qualified in their entirety by the Cautionary Statements.
Overview
In analyzing the financial results of the Partnership, the following matters
should be considered.
The Petro acquisition was made on March 26, 1999. Accordingly, the results of
operations for the nine month period ended June 30, 2000 include Petro's results
for the entire period whereas the results for the previous corresponding nine
month period only include the heating oil segment's results of operations for
approximately one quarter. Since the Petro acquisition was included for both
periods, the results for the three month period ended June 30, 2000 are
comparable to the three month period ended June 30, 1999.
The Total Gas and Electric (TG&E) acquisition was made on April 7, 2000.
Accordingly, the results of operations for the three and nine month periods
ended June 30, 2000 include TG&E's results from April 7, 2000.
The primary use for heating oil and propane 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. Accordingly, results of operations
for the periods presented are not indicative of the results to be expected for a
full year.
20
<PAGE>
THREE MONTHS ENDED JUNE 30, 2000
COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
--------------------------------------------
Volume
For the three months ended June 30, 2000, retail volume of home heating oil and
propane increased 8.4 million gallons, or 14.8%, to 65.4 million gallons, as
compared to 56.9 million gallons for the three months ended June 30, 1999. This
increase was due to an additional 5.6 million gallons provided by the heating
oil segment and a 2.8 million gallon increase in the propane segment. The
increase in the heating oil segment was largely due to the impact of colder
temperatures and additional volume provided by acquisitions. The 2.8 million
gallon increase in the propane segment was largely due to the impact of
additional volume provided by propane acquisitions, colder temperatures and
internal growth. Temperatures for the Partnership were 15.3% colder than in the
prior year's comparable quarter and 0.7% colder than normal.
Sales
For the three months ended June 30, 2000, sales increased $51.1 million, or
64.6%, to $130.2 million, as compared to $79.1 million for the three months
ended June 30, 1999. This increase was due to an additional $31.8 million
provided by the home heating oil segment, $11.3 million of TG&E sales and a $8.0
million increase in the propane segment. Sales rose in both the heating oil and
propane segments due to increased selling prices and from increased retail
volume. Selling prices increased versus the prior year's comparable period in
response to higher supply costs. Sales also increased in the heating oil
division by $5.2 million and by $0.7 million in the propane division due to an
increased focus on the sales of rationally related products including air
conditioning installation and service and water softeners.
Cost of Product
For the three months ended June 30, 2000, cost of product increased $37.6
million, or 131.1%, to $66.2 million, as compared to $28.6 million for the three
months ended June 30, 1999. This increase was due to an additional $22.0 million
of cost of product at the home heating segment, $10.2 million of TG&E cost of
product and a $5.4 million increase in the propane segment. The cost of product
for both the heating oil and propane segments increased due to the impact of
higher supply cost and for higher retail volume sales. While selling prices and
supply cost increased on a per gallon basis for both the heating oil and propane
divisions, the increase in selling prices was greater than the increase in
supply costs. This resulted in an increase in per gallon margins.
Cost of Installation, Service and Appliances
For the three months ended June 30, 2000, cost of installation, service and
appliances increased $4.5 million to $28.6 million, as compared to $24.0 million
for the three months ended June 30, 1999. This increase was entirely due to an
additional $4.5 million of expenses for the heating oil segment relating to an
increased focus on the sales of rationally related products, principally air
conditioning installation.
21
<PAGE>
Delivery and Branch Expenses
For the three months ended June 30, 2000, delivery and branch expenses increased
$3.3 million, or 10.2%, to $35.4 million, as compared to $32.1 million for the
three months ended June 30, 1999. This increase was due to an additional $2.4
million of delivery and branch expenses at the heating oil segment and a $0.9
million increase in delivery and branch expenses for the propane segment.
Delivery and branch expenses increased at the heating oil segment due to
additional operating cost for higher retail volume sales, inflation and for
additional operating cost of acquired companies. Delivery and branch expenses
increased at the propane segment primarily due to additional operating cost of
acquired propane companies.
Depreciation and Amortization Expenses
For the three months ended June 30, 2000, depreciation and amortization expenses
increased $0.4 million, or 4.6%, to $8.8 million, as compared to $8.5 million
for the three months ended June 30, 1999. This increase was primarily due to
$0.2 million of depreciation and amortization expense for TG&E and additional
depreciation and amortization for heating oil and propane acquisitions.
General and Administrative Expenses
For the three months ended June 30, 2000, general and administrative expenses
increased $1.0 million, or 24.6%, to $5.1 million, as compared to $4.1 million
for the three months ended June 30, 1999. The increase was due to $0.7 million
of TG&E general and administrative expenses and an additional $0.2 million of
general and administrative expenses for the propane segment. The $0.2 million
increase in general and administrative expenses at the propane segment was
largely due to an increase in professional and acquisition related expenditures.
TG&E Customer Acquisition Expense
For the three months ended June 30, 2000, TG&E customer acquisition expense was
$0.9 million. This TG&E segment expense is for the cost of acquiring new
accounts through the services of a third party direct marketing company. For the
three months ended June 30, 2000 TG&E added 25,000 new customers.
Unit Compensation Expense
For the three months ended June 30, 2000, unit compensation expense was $0.6
million. This expense was incurred under the Employee Unit Incentive Plan
whereby certain employees were granted senior subordinated units as an incentive
for increased efforts during employment and as an inducement to remain in the
service of the partnership.
Interest Expense, net
For the three months ended June 30, 2000, net interest expense increased $1.4
million, or 26.6%, to $6.6 million, as compared to $5.2 million for the three
months ended June 30, 1999. This increase was due to additional interest expense
for higher working capital borrowings necessitated by the higher cost of
product, as well as for additional interest expense for the financing of propane
and heating oil acquisitions.
22
<PAGE>
Income Tax Expense (Benefit)
For the three months ended June 30, 2000, income tax expense increased $5.4
million to less than $0.1 million, as compared to an income tax benefit of $5.4
million for the three months ended June 30, 1999. 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 a deferred
tax liability existing at June 30, 1999.
Net Loss
For the three months ended June 30, 2000, the net loss increased $3.8 million,
or 20.7%, to $22.0 million, as compared to $18.2 million for the three months
ended June 30, 1999. The increase in the net loss is attributable to $5.4
million higher income tax expense due to the deferred tax benefit realized in
1999, $0.7 million of net loss attributable to TG&E and the $0.6 million of unit
compensation expense. Excluding the $6.7 million impact of these three items,
the net loss would have decreased by $2.9 million as compared to three months
ended June 30, 1999. This improvement in the net loss was due to acquisitions,
internal growth, per gallon improvement in gross profit margins and to colder
weather.
Earnings before interest, taxes, depreciation and amortization, TG&E customer
acquisition expense and unit compensation expense, less net gain (loss) on sales
of equipment (EBITDA)
Earnings before interest, taxes, depreciation and amortization, TG&E customer
acquisition expense and unit compensation expense, less net gain (loss) on sales
of equipment (EBITDA) increased $4.7 million, to a loss of $5.1 million, as
compared to a loss of $9.8 million for the three months ended June 30, 1999.
This increase was due to $2.9 million of additional EBITDA generated by the
heating oil segment, $0.3 million of TG&E EBITDA and a $1.5 million increase in
the propane segment EBITDA. The increase in the heating oil and propane segments
was due to additional EBITDA provided by acquisitions, propane internal growth,
higher per gallon gross profit margins and by the impact of colder temperatures
on the Partnership's results. 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.
23
<PAGE>
NINE MONTHS ENDED JUNE 30, 2000
COMPARED TO NINE MONTHS ENDED JUNE 30, 1999
-------------------------------------------
Volume
For the nine months ended June 30, 2000, retail volume of propane and heating
oil increased 273.4 million gallons, or 199.9%, to 410.2 million gallons, as
compared to 136.8 million gallons for the nine months ended June 30, 1999. This
increase was due to 267.3 million gallons of additional volume provided by the
heating oil segment and a 6.2 million gallon increase in the propane segment.
While retail propane volume was favorably impacted by acquisitions and internal
growth, a 2.4 million gallon reduction in agriculture sales and warmer
temperatures negatively impacted volumes. The abnormal weather conditions during
the first fiscal quarter resulted in a very dry fall harvest, which
significantly reduced propane demand for crop drying. In the Partnership's
propane operating areas, temperatures for the nine months ending June 30, 2000,
were 1.8% warmer than in the prior year's comparable period and 11.4% warmer
than normal.
Sales
For the nine months ended June 30, 2000, sales increased $477.3 million, or
295.7%, to $638.7 million, as compared to $161.4 million for the nine months
ended June 30, 1999. This increase was attributable to $431.7 million additional
sales provided by the heating oil segment, $11.2 million of TG&E sales and a
$34.4 million increase in propane sales. Propane sales increased due to higher
selling prices in response to higher propane supply costs and from the increased
retail volume. Sales in the propane division also rose by $2.2 million due to an
increased focus on the sales of rationally related products.
Cost of Product
For the nine months ended June 30, 2000, cost of product increased $269.6
million, or 461.0%, to $328.0 million, as compared to $58.5 million for the nine
months ended June 30, 1999. This increase was due to $232.2 million of
additional costs attributable to the heating oil segment, $10.2 million of TG&E
cost of product and for higher propane supply cost of $27.2 million. While both
propane selling prices and propane supply costs increased on a per gallon basis,
the increase in selling prices was more than the increase in supply costs, which
resulted in an increase in per gallon margins.
Cost of Installation, Service and Appliances
For the nine months ended June 30, 2000, cost of installation, service and
appliances increased $62.2 million, or 233.5%, to $88.9 million, as compared to
$26.7 million for the nine months ended June 30, 1999. This increase was
primarily due to $61.6 million of additional costs relating to the heating oil
segment's cost of installation and service.
Delivery and Branch Expenses
For the nine months ended June 30, 2000, delivery and branch expenses increased
$66.5 million, or 122.2%, to $121.0 million, as compared to $54.4 million for
the nine months ended June 30, 1999. This increase was due to $63.7 million of
additional heating oil operating costs and $2.8 million of additional operating
costs for the propane segment. The increase for the propane segment was due to
additional cost of acquired propane companies and expenses related to the
propane segment's tank set program, which has increased same store residential
volume by approximately 3%.
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Depreciation and Amortization
For the nine months ended June 30, 2000, depreciation and amortization expenses
increased $11.0 million, or 75.6%, to $25.4 million, as compared to $14.5
million for the nine months ended June 30, 1999. This increase was primarily due
to $10.9 million of heating oil segment depreciation and amortization.
General and Administrative Expenses
For the nine months ended June 30, 2000, general and administrative expenses
increased $7.1 million, or 98.6%, to $14.3 million, as compared to $7.2 million
for the nine months ended June 30, 1999. This increase was primarily due to the
inclusion of an additional $5.5 million of general and administrative expenses
for the heating oil segment and $0.7 million of TG&E general and administrative
expenses. The $0.9 million increase in general and administrative expenses at
the propane segment was largely due to an increase in incentive compensation,
inflation and acquisition related expenditures.
Interest Expense, net
For the nine months ended June 30, 2000, net interest expense increased $10.2
million, or 104.7%, to $20.0 million, as compared to $9.8 million for the nine
months ended June 30, 1999. This change was primarily due to $9.5 million of
additional interest expense at the heating oil segment, $0.2 million of net
interest expense for TG&E and additional interest expense for the financing of
the propane acquisitions.
Income Tax Expense (Benefit)
For the nine months ended June 30, 2000, income tax expense increased $5.7
million to $0.4 million, as compared to an income tax benefit of $5.3 million
for the nine months ended June 30, 1999. 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 a deferred tax liability
existing at June 30, 1999.
Net Income
For the nine months ended June 30, 2000, net income increased $43.7 million, to
$39.1 million, as compared to a net loss of $4.6 million for the nine months
ended June 30, 1999. Additional net income provided by the heating oil segment
was $42.5 million while TG&E incurred a $0.7 million loss for the period. The
$2.3 million increase in net income for the propane segment was due to the
segment's acquisition program, internal growth and a per gallon improvement in
gross profit margins, partially reduced by the impact of warmer temperature on
the propane segment's results.
Earnings before interest, taxes, depreciation and amortization, TG&E customer
acquisition expense and unit compensation expense, less net gain (loss) on sales
of equipment (EBITDA)
Earnings before interest, taxes, depreciation and amortization, TG&E customer
acquisition expense and unit compensation expense, less net gain (loss) on sales
of equipment (EBITDA) increased $71.9 million, or 490.9%, to 86.5 million for
the nine months ended June 30, 2000, as compared to $14.6 million for the prior
year's comparable period. This increase was due to $68.8 million of additional
EBITDA generated by the heating oil segment, a $2.8 million increase in the
propane segment EBITDA and $0.3 million of EBITDA for TG&E. The increase in the
propane segment was due to additional EBITDA provided by propane acquisitions,
propane internal growth and higher per gallon propane gross profit margins
reduced by the impact of warmer temperatures on the propane segment's results.
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.
25
<PAGE>
Liquidity and Capital Resources
During February 2000, the partnership sold 1.7 million common units (including
0.2 million of overallotment units exercised), the net proceeds of which, net of
underwriter's discounts, commissions, and offering expenses was $22.6 million.
These funds combined with net cash provided by operating activities of $14.6
million, $28.0 million of long-term debt ($27.5 million of privately placed debt
and $0.5 million in an acquisition note), $19.0 million in net credit and
acquisition facility borrowings, $0.3 million in proceeds from the sale of fixed
assets, and $0.9 million in cash acquired in an acquisition amounted to $85.4
million. Such funds were used for capital expenditures of $4.6 million,
acquisitions of $49.2 million, distributions of $25.7 million, debt repayment of
$1.2 million, and other financing activities of $1.5 million. As a result of the
above activity, cash increased by $3.2 million to $7.6 million.
The $27.5 million of privately placed debt mentioned above was comprised of two
issuances. In March 2000, the propane division issued $12.5 million of 8.67%
First Mortgage Notes ("8.67% Notes") with a final maturity of March 30, 2012.
The 8.67% Notes require semiannual interest payments on March 30 and September
30. The propane division also issued $15.0 million of 8.72% First Mortgage Notes
("8.72% Notes") that require semiannual interest payments on March 30 and
September 30 and require annual prepayments of $3.0 million commencing on March
30, 2011. The total proceeds from these note issuances of $27.5 million were
used to repay $25.0 million borrowed under the propane division's bank
acquisition facility with the balance of $2.5 million set aside for general
operating purposes within the propane segment.
During July 2000, the holders of $11.2 million of the heating oil segment's 9.0%
Senior Notes exercised their option to extend the first sinking fund payment of
such notes by one year to October 1, 2001. In accordance with the terms of this
election, the interest rate on this portion of the Senior Notes has been
increased to 10.9%. These notes are included as part of current maturities of
long-term debt on the June 30, 2000 balance sheet.
For the remainder of fiscal 2000, the Partnership anticipates paying interest of
$6.8 million and anticipates growth and maintenance capital additions of
approximately $2.1 million. The Partnership has no material commitments for
capital expenditures. In addition, the Partnership plans to pay distributions on
its units in accordance with the partnership agreement. The Partnership also
plans to pursue strategic acquisitions as part of its business strategy and to
prudently fund such acquisitions through a combination of internally generated
cash, debt and equity. 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 its obligations for fiscal 2000.
Year 2000
As a result of the preparation and series of analyses and tests performed
before, during and after December 31, 1999, the Partnership did not experience
any significant disruption in information technology or operations as a result
of the date change-over to the year 2000.
Accounting Principles Not Yet Adopted
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.
Subsequently, the FASB issued SFAS No. 137 which 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.
26
<PAGE>
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.
Including TG&E, at June 30, 2000, the Partnership had outstanding borrowings of
approximately $38.1 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 a decrease of approximately
$0.4 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 product at June 30, 2000, the potential unrealized gain on the Partnership's
hedging activity would be increased by $4.4 million to an unrealized gain of
$10.9 million; and conversely a hypothetical ten percent decrease in the cost of
product would decrease the unrealized gain by $4.4 million to an unrealized gain
of $2.1 million.
PART II OTHER INFORMATION
-------------------------
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits Included Within:
-------------------------
(27) Financial Data Schedule
10.20 Eighth amendment dated June 30, 2000 to the Credit Agreement dated
December 13, 1995, between Star Gas Propane, L.P. and Fleet National
Bank formerly known as BankBoston, N.A., and Bank of America, N.A.
formerly known as NationsBank, N.A.
10.21 June 2000 Star Gas Employee Unit Incentive Plan.
(b) Reports on Form 8-K:
--------------------
None
27
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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 10, 2000
----------------
George Leibowitz Star Gas LLC
(Principal Financial Officer)
/s/ James J. Bottiglieri Vice President August 10, 2000
---------------------
James J. Bottiglieri Star Gas LLC
28
