<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, 1999
-----------------
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)
<TABLE>
<S> <C>
Delaware 06-1437793
- ----------------------------------- ------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
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
----- -----
</TABLE>
Indicate the number of shares outstanding of each issuer's classes of common
stock, as of January 31, 2000:
14,377,467 Common Units
2,476,797 Senior Subordinated Units
345,364 Junior Subordinated Units
325,729 General Partner Units
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARIES
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Part I Financial Information
Item 1 - Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 1999 and December 31, 1999 3
Condensed Consolidated Statements of Operations for the
Three months ended December 31, 1998 and December 31, 1999 4
Condensed Consolidated Statement of Partners' Capital for the
three months ended December 31, 1999 5
Condensed Consolidated Statements of Cash Flows for the three
months ended December 31, 1998 and December 31, 1999 6
Notes to Condensed Consolidated Financial Statements 7-16
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 17-20
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 21
Part II Other Information:
Item 6 - Exhibits and Reports on Form 8-K 21
Signature 22
</TABLE>
2
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 31,
September 30, 1999
1999 (unaudited)
---- -----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 4,492 $ 9,910
Receivables, net of allowance of $948 and $1,781 respectively 42,295 82,027
Inventories 26,317 28,000
Prepaid expenses and other current assets 13,764 11,296
-------- --------
Total current assets 86,868 131,233
-------- --------
Property and equipment, net 154,967 154,058
Long-term portion of accounts receivable 5,590 6,830
Intangibles and other assets, net 291,919 289,273
-------- --------
Total assets $539,344 $581,394
======== ========
Liabilities and Partners' Capital
Current liabilities:
Accounts payable $ 12,939 $ 20,248
Bank credit facility borrowings 3,150 41,325
Current maturities of long-term debt 1,391 18,190
Accrued expenses 43,044 42,066
Unearned service contract revenue 14,007 16,742
Customer credit balances 31,094 22,674
-------- --------
Total current liabilities 105,625 161,245
-------- --------
Long-term debt 276,638 262,130
Other long-term liabilities 6,905 6,748
Partners' Capital:
Common unitholders 145,906 145,318
Subordinated unitholders 5,878 7,387
General partner (1,608) (1,434)
-------- --------
Total Partners' Capital 150,176 151,271
-------- --------
Total Liabilities and Partners' Capital $539,344 $581,394
======== ========
</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 december 31,
--------------------------------------
(in thousands, except per unit data) 1998 1999
----------- ------------
<S> <C> <C>
Sales:
Product $ 27,149 $ 160,540
Installation, service and appliances 3,088 26,346
--------- ----------
Total sales 30,237 186,886
Costs and expenses:
Cost of product 10,952 86,546
Cost of installation, service and appliances 1,026 30,885
Delivery and branch 10,295 40,302
Depreciation and amortization 3,008 8,404
General and administrative 1,429 4,681
Net gain (loss) on sales of assets (4) 12
--------- ----------
Operating income 3,523 16,080
Interest expense, net 2,178 6,473
Amortization of debt issuance costs 45 129
--------- ----------
Income before income taxes 1,300 9,478
Income tax expense 6 113
--------- ----------
Net income $ 1,294 $ 9,365
========= ==========
General Partner's interest in net income $ 26 $ 174
--------- ----------
Limited Partners' interest in net income $ 1,268 $ 9,191
========= ==========
Basic and diluted net income per Limited Partner unit $ 0.20 $ 0.53
========= ==========
Basic and diluted weighted average number of Limited
Partner units outstanding 6,255 17,200
========= ==========
</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
Net income 7,682 1,324 185 174 9,365
Distributions
($0.575 per common unit) (8,270) (8,270)
-----------------------------------------------------------------------------------
Balance as of
December 31, 1999 14,378 2,477 345 326 $145,318 $7,262 $125 $(1,434) $151,271
===================================================================================
</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) Three Months Ended December 31,
-------------------------------------
1998 1999
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,294 $ 9,365
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,008 8,404
Amortization of debt issuance cost 45 129
Provision for losses on accounts receivable (18) 430
Loss (gain) on sales of assets 4 (12)
Changes in operating assets and liabilities, net of amounts acquired:
Increase in receivables (3,856) (41,376)
Decrease (increase) in inventories 710 (1,679)
Decrease in other assets 313 2,727
Increase in accounts payable 511 7,410
Increase (decrease) in other current and long-term liabilities 233 (6,876)
-------- --------
Net cash provided by (used in) operating activities 2,244 (21,478)
-------- --------
Cash flows from investing activities:
Capital expenditures (1,312) (1,569)
Proceeds from sales of fixed assets 39 135
Acquisition related costs (12) -
Acquisitions - (3,615)
-------- --------
Net cash used in investing activities (1,285) (5,049)
-------- --------
Cash flows from financing activities:
Credit facility borrowings 10,450 47,600
Credit facility repayments (4,500) (9,425)
Acquisition facility borrowings - 5,000
Repayment of debt, net - (2,709)
Distributions (2,193) (8,270)
Other - (251)
-------- --------
Net cash provided by financing activities 3,757 31,945
-------- --------
Net increase in cash 4,716 5,418
Cash at beginning of period 1,115 4,492
-------- --------
Cash at end of period $ 5,831 $ 9,910
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) Partnership Organization
Star Gas Partners, L.P. ("Star Gas Partners" or the "Partnership") is a
leading distributor of home heating oil and propane in the United States.
Star Gas Partners is a Master Limited Partnership whose 14.4 million common
limited partner units (trading symbol "SGU" representing 82.04% limited
partner interest in Star Gas Partners) and 2.5 million senior subordinated
units (trading symbol "SGH" representing 14.13% limited partner interest in
Star Gas Partners) are traded on the New York Stock Exchange, Inc.
Additional interest in Star Gas Partners are represented by 0.3 million
junior subordinated units (representing 1.97% limited partner interest in
Star Gas Partners) and 0.3 million general partner units (representing
1.86% general partner interest in Star Gas Partners).
Petro Holdings, Inc. ("Petro" or "heating oil segment"), is the nation's
largest distributor of home heating oil and serves approximately 335,000
customers in the Northeast and Mid-Atlantic region of the United States.
Petro and Stellar Propane Corp. are indirect wholly owned subsidiaries 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, that
markets and distributes propane gas and related products to approximately
186,000 retail and wholesale customers in the Midwest and Northeast.
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.,
Star Gas Propane and its corporate subsidiaries. Beginning March 26, 1999,
the Consolidated Financial Statements also include the accounts and results
of operations of Petro and its subsidiaries. All material intercompany
items and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
Revenue Recognition
Sales of propane, heating oil and equipment are recognized at the time of
delivery of the product to the customer or at the time of sale, service, or
installation. Revenue from repairs and maintenance service is recognized
upon completion of the service. Payments received from customers for
heating oil equipment service contracts are deferred and amortized into
income over the terms of the respective service contracts, on a straight
line basis, which generally do not exceed one year.
7
<PAGE>
2) Summary of Significant Accounting Policies - (continued)
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. Both the propane and heating oil segments
amortize goodwill using the straight-line method over a twenty-five year
period.
Covenants not to compete are non-compete agreements established with the
owners of an acquired company. For both the propane and heating oil
segments, covenants not to compete are amortized over the respective lives
of the covenants, which are generally five years.
Customer lists are the names and delivery addresses of the acquired
company's patrons. Based on the historical retention experience of these
lists, the propane segment amortizes customer lists on a straight-line
method over fifteen years, and the heating oil segment amortizes customer
lists on a straight-line method over ten years.
Deferred charges represent the costs associated with the issuance of debt
instruments. Both the heating oil and propane segments amortize deferred
charges 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.
Advertising Expenses
Advertising costs are expensed as they are incurred.
8
<PAGE>
2) Summary of Significant Accounting Policies - (continued)
Customer Credit Balances
Customer credit balances represent pre-payments received from customers
pursuant to a budget payment plan (whereby customers pay their estimated
annual propane / heating oil charges on a fixed monthly basis) and the
payments made have exceeded the charges for deliveries.
Environmental Costs
The Partnership expenses, on a current basis, costs associated with
managing hazardous substances and pollution in ongoing operations. The
Partnership also accrues for costs associated with the remediation of
environmental pollution when it becomes probable that a liability has been
incurred and the amount can be reasonably estimated.
Derivatives and Premiums
The Partnership uses derivatives to hedge the price risk associated with
the heating oil and propane gallons it sells to guaranteed maximum price
customers. 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.
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 limited partners. Net
earnings for financial statement purposes will differ significantly from
taxable income reportable to unitholders as a result of differences between
the tax basis and financial reporting basis of assets and liabilities and
due to the taxable income allocation requirements of the Partnership
agreement.
The Partnership's corporate subsidiaries file a consolidated Federal income
tax return. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amount of assets and liabilities and their respective
tax bases and operating loss carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled.
Accounting Changes
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133 - "Accounting
for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and
for hedging activities. In June 1999, FASB amended the effective date for
SFAS No. 133 to all fiscal quarters of all fiscal years beginning after
June 15, 2000. The Partnership is assessing the impact and disclosure
requirements of SFAS No. 133.
9
<PAGE>
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 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.
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.
Distributions will not be made on the senior subordinated units, junior
subordinated units, or general partner units until May 2000 at the
earliest, at which time the Board will consider the appropriateness of any
distribution payments for these units.
10
<PAGE>
3) Quarterly Distribution of Available Cash - (continued)
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 two reportable
segments, heating oil and propane. Management has chosen to organize the
enterprise under these two segments in order to leverage the expertise it
has in each industry, allow each segment to continue to strengthen its core
competencies and facilitate a clear means for evaluation.
The 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.
The following are the statements of operations and balance sheets for each
segment as of the periods indicated. The heating oil segment was
consolidated with the propane segment beginning March 26, 1999. There were
no inter-segment sales between the propane segment and the heating oil
segment
11
<PAGE>
4) Segment Reporting - (continued)
<TABLE>
<CAPTION>
(in thousands) Three Months Ended Three Months Ended
December 31, 1998 December 31, 1999
--------------------------- -----------------------------
Heating Heating
Oil Propane Consol. Oil Propane Consol.
--- ------- ------- --- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
- -----------------------
Sales:
Product $ - $27,149 $27,149 $123,885 $36,655 $160,540
Installation, service,
and appliance - 3,088 3,088 22,448 3,898 26,346
------- ------- ------- -------- ------- --------
Total sales - 30,237 30,237 146,333 40,553 186,886
Costs and expenses:
Cost of product - 10,952 10,952 68,887 17,659 86,546
Cost of installation,
service, and appliances - 1,026 1,026 29,512 1,373 30,885
Delivery and branch - 10,295 10,295 29,176 11,126 40,302
Depreciation and
amortization - 3,008 3,008 5,306 3,098 8,404
General and administrative - 1,429 1,429 2,886 1,795 4,681
Net gain (loss) on sales of assets - (4) (4) 3 9 12
------- ------- ------- -------- ------- --------
Operating income - 3,523 3,523 10,569 5,511 16,080
Interest expense, net - 2,178 2,178 4,276 2,197 6,473
Amortization of debt
issuance costs - 45 45 84 45 129
------- ------- ------- -------- ------- --------
Income before
income taxes - 1,300 1,300 6,209 3,269 9,478
Income tax expense - 6 6 75 38 113
------- ------- ------- -------- ------- --------
Net income $ - $ 1,294 $ 1,294 $ 6,134 $ 3,231 $ 9,365
======= ======= ======= ======== ======= ========
Capital expenditures $ - $ 1,312 $ 1,312 $ 453 $ 1,116 $ 1,569
======= ======= ======= ======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
(in thousands) September 30, 1999 December 31, 1999
----------------------------- -----------------------------
Heating (1) Heating (1)
Oil Propane Consol. Oil Propane Consol.
--- ------- ------- --- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet
- -------------
Assets
Current assets:
Cash and cash equivalents $ 4,270 $ 222 $ 4,492 $ 7,071 $ 2,839 $ 9,910
Receivables 35,960 6,335 42,295 66,470 15,557 82,027
Inventories 16,498 9,819 26,317 17,603 10,397 28,000
Prepaid expenses and other current assets 13,678 1,156 13,764 11,561 698 11,296
-------- -------- -------- -------- -------- --------
Total current assets 70,406 17,532 86,868 102,705 29,491 131,233
Property and equipment, net 39,849 115,118 154,967 39,303 114,755 154,058
Long-term portion of accounts receivable 5,590 - 5,590 6,830 - 6,830
Investment in Petro Holdings - 83,233 - - 83,875 -
Intangibles and other assets, net 236,981 54,938 291,919 235,161 54,103 289,273
-------- -------- -------- -------- -------- --------
Total assets $352,826 $270,821 $539,344 $383,999 $282,224 $581,394
======== ======== ======== ======== ======== ========
Liabilities and Partners' Capital
Current Liabilities:
Accounts payable $ 7,366 $ 5,573 $ 12,939 $ 16,041 $ 4,308 $ 20,248
Bank credit facility borrowings - 3,150 3,150 32,000 9,325 41,325
Current maturities of long-term debt 1,391 - 1,391 16,190 2,000 18,190
Accrued expenses 39,012 4,231 43,044 36,397 5,660 42,066
Unearned service contract revenue 14,007 - 14,007 16,742 - 16,742
Customer credit balances 26,657 4,437 31,094 19,274 3,400 22,674
-------- -------- -------- -------- -------- --------
Total current liabilities 88,433 17,391 105,625 136,644 24,693 161,245
Long-term debt 174,338 102,300 276,638 156,830 105,300 262,130
Other long-term liabilities 6,822 92 6,905 6,650 98 6,748
Partners' Capital / Equity Capital 83,233 151,038 150,176 83,875 152,133 151,271
-------- -------- -------- -------- -------- --------
Total Liabilities and Partners' Capital $352,826 $270,821 $539,344 $383,999 $282,224 $581,394
======== ======== ======== ======== ======== ========
</TABLE>
(1) The consolidated amounts include the necessary entries to eliminate the
Investment in Petro Holdings.
12
<PAGE>
5) Inventories
The components of inventory were as follows:
<TABLE>
<CAPTION>
(in thousands) September 30, 1999 December 31, 1999
------------------ ------------------
<S> <C> <C>
Propane gas $ 7,678 $ 8,468
Propane appliances and equipment 2,141 1,929
Fuel oil 9,959 11,047
Fuel oil parts and equipment 6,539 6,556
------- -------
$26,317 $28,000
======= =======
</TABLE>
Substantially all of the Partnership's propane supplies for the Northeast
retail operations are purchased under supply contracts. Certain of the
supply contracts provide for minimum and maximum amounts of propane to be
purchased thereunder, and provide for pricing in accordance with posted
prices at the time of delivery or include a pricing formula that typically
is based on current market prices. Historically, spot purchases from 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
half of total propane purchases.
The Partnership obtains home heating oil in either barge or truckload
quantities, and has contracts with over 80 terminals for the right to
temporarily store its heating oil at facilities not owned by the
Partnership. Purchases are made pursuant to supply contracts or on the spot
market. The Partnership has market price based contracts for substantially
all its petroleum requirements with 12 different suppliers, the majority of
which have significant domestic sources for their product, and many of
which have been suppliers for over 10 years. Typically supply contracts
have terms of 12 months. All of the supply contracts provide for maximum
and in some cases minimum quantities, and in most cases the price is based
upon the market price at the time of delivery.
The Partnership may enter into forward contracts with Mont Belvieu
suppliers, heating oil suppliers or refineries which call for a fixed price
for the product to be purchased based on current market conditions, with
delivery occurring at a later date. In most cases the Partnership has
entered into similar agreements to sell this product to customers for a
fixed price based on market conditions. In the event that the Partnership
enters into these types of contracts without a subsequent sale, it is
exposed to some market risk. Currently, the Partnership does not have any
contracts that if market conditions were to change, would have a material
affect on its financial statements.
Concentration of Revenue with Guaranteed Maximum Price Customers
Approximately 25% of the volume sold in the Partnership's heating oil
segment is sold to individual customers under an agreement pre-establishing
the maximum sales price of home heating oil over a twelve month period. The
maximum price at which home heating oil is sold to these capped-price
customers is generally renegotiated prior to the heating season of each
year based on current market conditions. The heating oil segment currently
enters into forward purchase contracts and futures contracts for a
substantial majority of the heating oil it sells to these capped-price
customers in advance and at a fixed cost. Should events occur after a
capped-sales price is established that increases the cost of home heating
oil above the amount anticipated, margins for the capped-price customers
whose heating oil was not purchased in advance would be lower than
expected, while those customers whose heating oil was purchased in advance
would be unaffected. Conversely, should events occur during this period
that decrease the cost of heating oil below the amount anticipated, margins
for the capped-price customers whose heating oil was purchased in advance
could be lower than expected, while those customers whose heating oil was
not purchased in advance would be unaffected or higher than expected.
13
<PAGE>
5) Inventories - (continued)
In accordance with SFAS No. 80, "Accounting for Futures Contracts," futures
contracts are classified as a hedge when the item to be hedged exposes the
company to price risk and the futures contract reduces that risk exposure.
Future contracts that relate to transactions that are expected to occur are
accounted for as a hedge when the significant characteristics and expected
terms of the anticipated transactions are identified and it is probable
that the anticipated transaction will occur. If a transaction does not
meet the criteria to qualify as a hedge, it is considered to be
speculative. Any gains or losses associated with futures contracts which
are classified as speculative are recognized in the current period. If a
futures contract that has been accounted for as a hedge is closed or
matures before the date of the anticipated transaction, the accumulated
change in value of the contract is carried forward and included in the
measurement of the related transaction. Option contracts are accounted for
in the same manner as futures contracts. Based upon the above the
Partnership accounts for its derivative activity as hedge transactions.
To hedge a substantial portion of the heating oil gallons being sold to its
guaranteed maximum price customers, the heating oil segment at December 31,
1999 had 1.7 million gallons of forward purchase contracts for heating oil
with a notional value of $1.0 million and a fair market value of $1.1
million; 40.2 million gallons of futures contracts to buy heating oil with
a notional value of $20.5 million and a fair market value of $26.9 million;
23.1 million gallons of futures contracts to sell heating oil with a
notional value of $11.9 million and a fair market value of $15.3 million;
33.6 million gallons of option contracts to buy heating oil with a notional
value of $20.0 million and a fair market value of $20.1 million; and 9.7
million gallons of option contracts to sell heating oil with a notional
value of $5.0 million and a fair market value of $6.5 million. The
contracts expire at various times with no contract expiring later than July
2000.
At December 31, 1999 the propane segment had options to buy 2.5 million
gallons of propane with a notional value of $0.8 million and a fair market
value totaling $1.1 million. The option contract expires in March 2000.
At December 31, 1999 the unrealized gains on the heating oil segment's and
propane segment's hedging activity was approximately $3.3 million and $0.3
million respectively. The heating oil segment's hedging activity is
designed to help it achieve its planned margins and represents
approximately 25% of the expected total home heating oil volume sold in a
twelve month period. The propane segment's hedging activity is also
designed to help it achieve its planned margins and represents
approximately 5% of the expected total propane volume sold in a twelve
month period.
The carrying amount of all hedging financial instruments at December 31,
1999 was $1.0 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.
14
<PAGE>
6) Acquisitions
During the three month period ending December 31, 1999, the Partnership
acquired two unaffiliated retail heating oil dealers and one unaffiliated
retail propane dealer. The aggregate consideration for these acquisitions
accounted for by the purchase method of accounting was approximately $3.6
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 $ 100 -
Fleet 517 5 - 30 years
Tanks and equipment 480 5 - 30 years
Customer lists 1,241 7 - 15 years
Restrictive covenants 700 5 years
Goodwill 541 25 years
Inventory 6 -
Working capital 30 -
------
Total $3,615
======
</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 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>
<CAPTION>
<S> <C>
Sales $187,223
========
Net income $ 9,323
========
General Partner's interest in net income $ 173
========
Limited Partners' interest in net income $ 9,150
========
Basic and Diluted net income per limited partner unit $ 0.53
========
</TABLE>
7) Supplemental Disclosure of Cash Flow Information
<TABLE>
<CAPTION>
(in thousands) Three Months Ended December 31,
----------------------------------------
1998 1999
------------------ -----------------
<S> <C> <C>
Cash paid during the period for:
Income taxes $ - $ 3
Interest $ 279 $ 7,897
</TABLE>
15
<PAGE>
8) Earnings Per Limited Partner Units
<TABLE>
<CAPTION>
(in thousands, except per unit data) Three Months Ended December 31,
-------------------------------
1998 1999
--------------- --------------
Basic Earnings Per Unit:
------------------------
<S> <C> <C>
Net income $1,294 $ 9,365
Less: General Partner's interest in net income 26 174
------ -------
Limited Partner's interest in net income $1,268 $ 9,191
====== =======
Common Units 3,859 14,378
Senior Subordinated Units - 2,477
Junior Subordinated Units - 345
Subordinated Units 2,396 -
------ -------
Weighted average number of Limited Partner units outstanding 6,255 17,200
====== =======
Basic earnings per unit $ 0.20 $ 0.53
====== =======
Diluted Earnings Per Unit:
--------------------------
Effect of dilutive securities $ - $ -
------ -------
Limited Partner's interest in net income $1,268 $ 9,191
====== =======
Effect of dilutive securities - -
------ -------
Weighted average number of Limited Partner units outstanding 6,255 17,200
====== =======
Diluted earnings per unit $ 0.20 $ 0.53
====== =======
</TABLE>
9) Subsequent Events
Cash Distribution
On January 24, 2000 the Partnership announced that it would pay a cash
distribution of $0.575 per Common Unit for the three months ended December
31, 1999. The distribution will be paid on February 11, 2000 to holders of
record as of February 2, 2000.
Equity and Debt Registration
On January 3, 2000 the Partnership filed a shelf registration for $100
million of Common Units, Partnership Securities (any class of limited
partner interest other than common units) and debt securities with the
Securities and Exchange Commission.
Acquisition
On January 28, 2000 the Partnership announced the signing of a purchase
agreement to acquire certain operations of a privately owned Midwest retail
propane distributor, consisting of more than 12.4 million gallons of
propane sold annually to 14,000 customers. The consummation of this
transaction is subject to finalization of financing and certain other
conditions.
Letter of Intent to Enter Deregulated Electric and Natural Gas Markets
On January 28, 2000 the Partnership announced the signing of a letter of
intent to invest approximately $8.0 million to acquire a controlling
interest in a privately owned independent marketer of electricity and
natural gas. The consummation of this transaction is subject to the signing
of a definitive agreement, finalization of financing and other normal
closing conditions.
16
<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 and 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 Financial Condition
and Results of Operations" and "Business" 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 three month period ended December 31, 1999 include Petro's
results whereas the results for the previous corresponding quarter only include
the propane segment's results.
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.
17
<PAGE>
THREE MONTHS ENDED DECEMBER 31, 1999
COMPARED TO THREE MONTHS ENDED DECEMBER 31, 1998
------------------------------------------------
Volume
For the three months ended December 31, 1999, retail volume of home heating oil
and propane increased 106.7 million gallons or 362.8%, to 136.1 million gallons,
as compared to 29.4 million gallons for the three months ended December 31,
1998. This increase was due to 104.0 million gallons provided by the heating
oil segment and a 2.7 million gallon increase in the propane segment. While
retail propane volume was favorably impacted by acquisitions, colder
temperatures and internal growth of over 3.0%, which led to a 4.8 million gallon
increase in volume, a 2.1 million gallon reduction in agricultural sales
partially offset these benefits. 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 three months ended December 31, 1999, were 2.7%
colder than in the prior year's comparable period and 12.2% warmer than normal.
Sales
For the three months ended December 31, 1999, sales increased $156.6 million, or
518.1%, to $186.9 million, as compared to $30.2 million for the three months
ended December 31, 1998. This increase was due to $146.3 million provided by
the home heating oil segment and a $10.3 million increase in the propane
segment. Sales rose in the propane segment due to the increased retail volume
in the base business, acquisitions and from increased selling prices. Selling
prices increased versus the prior year's comparable period in response to higher
propane supply costs. Sales in the propane division also rose by $0.4 million
due to an increased focus on the sales of rationally related products.
Cost of Product
For the three months ended December 31, 1999, cost of product increased $75.6
million, or 690.2%, to $86.5 million, as compared to $11.0 million for the three
months ended December 31, 1998. Cost of product relating to heating oil sales
accounted for $68.9 million of this increase. In the propane segment, cost of
product increased by $6.7 million due to the impact of higher retail volume
sales and higher propane supply cost. While both propane selling prices and
propane supply cost increased on a per gallon basis, the increase in selling
prices was greater than the increase in supply costs, which resulted in an
increase in per gallon margins.
Cost of Installation, Service and Appliances
For the three months ended December 31, 1999, cost of installation, service and
appliances increased $29.9 million, to $30.9 million, as compared to $1.0
million for the three months ended December 31, 1998. This increase was almost
entirely due to the inclusion of $29.5 million of expenses relating to the
heating oil segment's cost of installation and service.
18
<PAGE>
Delivery and Branch Expenses
For the three months ended December 31, 1999, delivery and branch expenses
increased $30.0 million, or 291.5%, to $40.3 million, as compared to $10.3
million for the three months ended December 31, 1998. Delivery and branch
expenses at the heating oil segment accounted for $29.2 million of this change.
The $0.8 million increase in delivery and branch expenses for the propane
segment was due to additional operating cost of acquired propane companies and
expenses relating to the propane segment's tank set program, which has increased
same store residential volume by approximately 3%.
Depreciation and Amortization
For the three months ended December 31, 1999, depreciation and amortization
expenses increased $5.4 million, or 179.4%, to $8.4 million, as compared to $3.0
million for the three months ended December 31, 1998. This increase was
primarily due to $5.3 million of heating oil segment depreciation and
amortization with the remainder attributable to the impact of propane
acquisitions and other fixed asset additions.
General and Administrative Expenses
For the three months ended December 31, 1999, general and administrative
expenses increased $3.3 million, or 227.6%, to $4.7 million, as compared to $1.4
million for the three months ended December 31, 1998. General and
administrative expenses at the heating oil segment accounted for $2.9 million of
this increase. The $0.4 million increase in general and administrative expenses
at the propane segment was largely due to an increase in incentive compensation,
inflation and employee relocation expenses.
Interest Expense, net
For the three months ended December 31, 1999, net interest expense increased
$4.3 million, or 197.2%, to $6.5 million, as compared to $2.2 million for the
three months ended December 31, 1998. This change was entirely due to $4.3
million of interest expense at the heating oil segment.
Net Income
For the three months ended December 31, 1999, net income increased $8.1
million, or 623.7%, to $9.4 million, as compared to $1.3 million for the three
months ended December 31, 1998. Net income provided by the heating oil segment
was $6.1 million. The increase in the propane segment's net income was
attributable to the impact of propane acquisitions, higher per gallon gross
profit margins and additional retail volume provided by colder temperatures and
internal growth.
Earnings before interest, taxes, depreciation and amortization, less net gain
(loss) on sales of equipment (EBITDA)
Earnings before interest, taxes, depreciation and amortization, less net gain
(loss) on sales of equipment (EBITDA) increased $17.9 million, or 274.5%, to
$24.5 million for the three months ended December 31, 1999, as compared to $6.5
million for the prior year's comparable period. This increase was due to the
impact of propane acquisitions, higher per gallon propane gross profit margins,
additional propane retail volume and $15.9 million of EBITDA generated by the
heating oil segment. EBITDA should not be considered as an alternative to net
income (as an indicator of operating performance) or as an alternative to cash
flow (as a measure of liquidity or ability to service debt obligations), but
provides additional information for evaluating the Partnership's ability to make
the Minimum Quarterly Distribution. The definition of "EBITDA" set forth above
may be different from that used by other companies.
19
<PAGE>
Liquidity and Capital Resources
Cash provided by bank facility borrowings of $43.2 million were used for $21.5
million in operating activities, $5.0 million investing activities, $8.3 million
for distributions and $3.0 for debt repayment and other financing activities. As
a result of the above activity, net cash increased $5.4 million.
The seasonal nature of the Partnership's business results in the sale by the
Partnership of approximately 30% of its volume in the first fiscal quarter,
resulting in a usual increase in receivables during the period. For the quarter
ended December 31, 1999 operating activities used $21.5 million of cash; as the
$41.4 million utilized by receivables were partially offset by $19.9 million of
cash provided by other operating activities. In addition, the $5.0 million
utilized for investing activities were used primarily for $1.5 million of growth
and maintenance capital expenditures and $3.6 million of acquisitions.
For the remainder of fiscal 2000, the Partnership anticipates paying interest of
$18.7 million and anticipates growth and maintenance capital additions of
approximately $6.0 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. In June
1999, FASB amended the effective date for SFAS No. 133 to all fiscal quarters of
all fiscal years beginning after June 15, 2000. The Partnership is assessing
the impact and disclosure requirements of SFAS No. 133.
20
<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.
At December 31, 1999, the Partnership had outstanding borrowings of
approximately $57.6 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
$0.6 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 and to some extent
propane for its propane 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 and propane being hedged.
Sensitivity analysis is a technique used to evaluate the impact of hypothetical
market value changes. Based on a hypothetical ten percent increase in the cost
of home heating oil and propane at December 31, 1999, the potential unrealized
gain on the Partnership's hedging activity would be increased by $1.6 million to
an unrealized gain of $5.2 million; and conversely a hypothetical ten percent
decrease in the cost of home heating oil and propane would decrease the
unrealized gain by $0.6 million to an unrealized gain of $3.0 million.
PART II OTHER INFORMATION
-------------------------
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits Included Within:
-------------------------
(27) Financial Data Schedule
21
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Partnership has duly caused this report to be signed on its behalf of the
undersigned thereunto duly authorized:
Star Gas Partners, L.P.
By: Star Gas LLC (General Partner)
Signature Title Date
- --------- ----- ----
/s/ George Leibowitz Chief Financial Officer February 1, 2000
-----------------------
George Leibowitz Star Gas LLC
(Principal Financial Officer)
/s/ James J. Bottiglieri Vice President February 1, 2000
-----------------------
James J. Bottiglieri Star Gas LLC
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM STAR GAS
PARTNERS, L.P. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET AS OF
DECEMBER 31, 1999 AND CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE
INTERIM PERIOD OCTOBER 1, 1999 THROUGH DECEMBER 31, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001002590
<NAME> STAR GAS PARTNERS, L.P.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 9,910
<SECURITIES> 0
<RECEIVABLES> 83,808
<ALLOWANCES> 1,781
<INVENTORY> 28,000
<CURRENT-ASSETS> 131,233
<PP&E> 195,173
<DEPRECIATION> 41,115
<TOTAL-ASSETS> 581,394
<CURRENT-LIABILITIES> 161,245
<BONDS> 262,130
0
0
<COMMON> 151,271
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 581,394
<SALES> 160,540
<TOTAL-REVENUES> 186,886
<CGS> 86,546
<TOTAL-COSTS> 117,431
<OTHER-EXPENSES> 52,945
<LOSS-PROVISION> 430
<INTEREST-EXPENSE> 6,473
<INCOME-PRETAX> 9,478
<INCOME-TAX> 113
<INCOME-CONTINUING> 9,365
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,365
<EPS-BASIC> 0.53
<EPS-DILUTED> 0.53
</TABLE>
