UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 2001 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required] For the transition period from _________ to _________ Commission File Number: 33-98490 --------- STAR GAS PARTNERS, L.P. ----------------------- (Exact name of registrant as specified in its charter) <TABLE> <S> <C> <C> Delaware 06-1437793 - --------------------------------------------------------------- --------------------------------------- (State or other jurisdiction of incorporation or organization) (I.R.S. Employer 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) </TABLE> Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered - ----------------------------------- ----------------------------------------- Common Units New York Stock Exchange Senior Subordinated Units New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of Star Gas Partners, L.P. Common Units held by non-affiliates of Star Gas Partners, L.P. on December 18, 2001 was approximately $448,100,000. As of December 18, 2001 the number of Star Gas Partners, L.P. shares outstanding for each class of common stock was: 23,393,946 Common Units 3,019,653 Senior Subordinated Units 345,364 Junior Subordinated Units 325,729 General Partner Units Documents Incorporated by Reference: None
STAR GAS PARTNERS, L.P. 2001 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS PART I <TABLE> <CAPTION> Page <S> <C> <C> Item 1. Business 3 Item 2. Properties 14 Item 3. Legal Proceedings - Litigation 14 Item 4. Submission of Matters to a Vote of Security Holders 14 PART II Item 5. Market for the Registrant's Units and Related Matters 15 Item 6. Selected Historical Financial and Operating Data 16 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 18 Item 7A. Quantitative and Qualitative Disclosures about Market Risk 25 Item 8. Financial Statements and Supplementary Data 25 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 25 PART III Item 10. Directors and Executive Officers of the Registrant 26 Item 11. Executive Compensation 30 Item 12. Security Ownership of Certain Beneficial Owners and Management 32 Item 13. Certain Relationships and Related Transactions 32 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 33 </TABLE> 2
PART I ITEM 1. BUSINESS Structure Star Gas Partners, L.P. ("Star Gas" or the "Partnership") is a diversified home energy distributor and services provider, specializing in heating oil, propane, natural gas and electricity. Star Gas is a master limited partnership, which at September 30, 2001 had 23.4 million common limited partner units (NYSE: "SGU" representing a 87.4% limited partner interest in Star Gas Partners) and 2.7 million senior subordinated units (NYSE: "SGH" representing a 10.1% limited partner interest in Star Gas Partners) outstanding. Additional Partnership interests include 0.3 million junior subordinated units (representing a 1.3% limited partner interest) and 0.3 million general partner units (representing a 1.2% general partner interest). Operationally the Partnership is organized as follows: . Star Gas Propane, L.P., ("Star Gas Propane" or the "propane segment") is a wholly owned subsidiary of Star Gas. Star Gas Propane markets and distributes propane gas and related products to approximately 280,000 customers in the Midwest, Northeast, Florida and Georgia. . Petro Holdings, Inc. ("Petro" or the "heating oil segment"), is the nation's largest distributor of home heating oil and serves approximately 530,000 customers in the Northeast and Mid-Atlantic. Petro is an indirect wholly owned subsidiary of Star Gas Propane, L.P. . 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 New York, New Jersey, Florida, Maryland and the District of Columbia and serves approximately 50,000 residential customers. TG&E is currently an 80% owned subsidiary of Star Gas Partners. . Star Gas Partners ("Partners" or the "Public Master Limited Partnership") includes the office of the Chief Executive Officer and in addition has the responsibility for maintaining investor relations and investor reporting for the Partnership. Seasonality The Partnership's fiscal year ends on September 30th. All references in this document are to fiscal years unless otherwise noted. The seasonal nature of the Partnership's business results in the sale of approximately 30% of its volume in the first quarter (October through December) and 45% of its volume in the second quarter (January through March) of each year, the peak heating season, because propane, heating oil and natural gas are primarily used for space heating in residential and commercial buildings. The Partnership generally realizes net income in both of these quarters and net losses during the quarters ending June and September. In addition, sales volume typically fluctuates from year to year in response to variations in weather, wholesale energy prices and other factors. Propane - ------- 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. Customers are served from 112 branch locations and 54 satellite storage facilities in the Midwest, Northeast, Florida and Georgia. In addition to its retail business, the segment serves wholesale customers from its underground cavern and storage facilities in Seymour, Indiana. Based on sales dollars, approximately 90% of propane sales were to retail customers and approximately 10% were to wholesale customers. Retail sales have historically had a greater profit margin, more stable customer base and less price sensitivity as compared to the wholesale business. Propane is used primarily for space and water heating, clothes drying and cooking. Residential customers are typically homeowners, while commercial customers include motels, restaurants, retail stores and laundromats. Industrial users, such as manufacturers, use propane as a heating and energy source in manufacturing and drying processes. In addition, propane is used to supply heat for drying crops and as a fuel source for certain vehicles. 3
Propane is extracted from natural gas at processing plants or separated from crude oil during the refining process. Propane is normally transported and stored in a liquid state under moderate pressure or refrigeration for ease of handling in shipping and distribution. When the pressure is released or the temperature is increased, propane is usable as a flammable gas. Propane is colorless and odorless; an odorant is added to allow its detection. Propane is clean-burning, producing negligible amounts of pollutants when consumed. According to the American Petroleum Institute, the domestic retail market for propane is approximately 9.4 billion gallons annually. As of 1997, propane accounted for approximately 3.5% of household energy consumption in the United States. Home Heating Oil - ---------------- Home heating oil customers are served from 35 branch locations in the Northeast and Mid-Atlantic regions, from which the heating oil segment installs and repairs heating equipment 24 hours a day, seven days a week, 52 weeks a year, generally within four hours of request. These services are an integral part of its basic heating oil business, and are designed to maximize customer satisfaction and loyalty. In 2001, the heating oil segment's sales were comprised of approximately 79% from sales of home heating oil; 15% from the installation and repair of heating and air conditioning equipment; and 6% from the sale of other petroleum products, including diesel fuel and gasoline, to commercial customers. Home heating oil is a primary source of home heat in the Northeast. The region accounts for approximately two-thirds of the demand for home heating oil in the United States. During 1997, approximately 6.9 million homes, or approximately 36% of all homes in the Northeast, were heated by oil. In recent years, demand for home heating oil has been affected by conservation efforts and conversions to natural gas. In addition, as the number of new homes that use oil heat has not been significant, there has been virtually no increase in the customer base due to housing starts. As a result, according to the most recent available data, residential heating oil consumption in the Northeast has declined from approximately 5.3 billion gallons in 1982 to 4.6 billion gallons in 1993. Natural Gas and Electricity - --------------------------- The Partnership is an independent reseller of natural gas and electricity to households and small commercial customers in deregulated markets, through its 80% controlling interest in TG&E. In the markets in which TG&E operates, natural gas and electricity are available from wholesalers. Substantially all of TG&E's natural gas purchases were from major wholesalers in fiscal 2001. Natural gas is transported to the local utility, through purchased or assigned capacity on pipelines. All of TG&E's electricity in fiscal 2001 was purchased from a major New York State wholesaler which delivers the electricity to the local utility company. The utility then delivers the gas and electricity to TG&E customers using their distribution system. The utility and TG&E coordinate delivery and billing, and also compete to sell natural gas and electricity to the ultimate consumer. Generally, TG&E pays the local utility a service charge to provide certain customer related costs like billing. Customers pay a separate delivery charge to the utility for bringing the natural gas or electricity from the customer's chosen supplier. In all but two of the markets in which TG&E operates, TG&E and local utility charges are itemized on one customer energy bill generated by the utility. For the remaining markets, TG&E bills its customers directly. 4
Industry Characteristics The retail propane and home heating oil industries are both mature, with total demand expected to remain relatively flat or to decline slightly. The Partnership believes that these industries are relatively stable and predictable due to the largely non-discretionary nature of propane and home heating oil use. Accordingly, the demand for propane and home heating oil has historically been relatively unaffected by general economic conditions but has been a function of weather conditions. It is common practice in both the propane and home heating oil distribution industries to price products to customers based on a per gallon margin over wholesale costs. As a result, distributors generally seek to maintain their margins by passing costs through to customers, thus insulating themselves from the volatility in wholesale heating oil and propane prices. However, during periods of sharp price fluctuations in supply costs, distributors may be unable or unwilling to pass entire cost increases or decreases through to customers. In these cases, significant increases or decreases in per gallon margins may result. In addition, the timing of cost pass-throughs can significantly affect margins. The propane and home heating oil distribution industries are highly fragmented, characterized by a large number of relatively small, independently owned and operated local distributors. Each year a significant number of these local distributors have sought to sell their business for reasons that include retirement and estate planning. In addition, the propane and heating oil distribution industries are becoming more complex due to increasing environmental regulations and escalating capital requirements needed to acquire advanced, customer oriented technologies. Primarily as a result of these factors, both industries are undergoing consolidation, and the propane segment and the heating oil segment have been active consolidators in each of their markets. In regard to our natural gas and electricity reselling segment, historically the local utility provided its customers with all three aspects of electric and natural gas service: generation, transmission and distribution of natural gas and electricity. However, under deregulation, state Public Utility Commissions throughout the country are licensing Energy Supply Companies ("ESCs"), such as TG&E, to be approved as alternative suppliers of the commodity portion to end-users. ESCs will provide the "generation" function, supplying electricity to specific delivery points. ESCs are essentially the "manufacturers" of the electricity. ESCs also act as natural gas distributors, as they bring natural gas to the local utility for redistribution on the utility system to the ultimate end-user, the customer. The local utility companies will continue to provide the "transmission" and "distribution" function, acting as the distributor of the electricity and natural gas. Restructuring (commonly called deregulation) means that consumers now have the option to select a new provider for the commodity portion of their bill - a new supplier of electricity or natural gas. ESCs are often able to supply electricity or natural gas to end users at discounts when compared to what is paid to the current local utility. Business Strategy The Partnership's primary objective is to increase cash flow on a per unit basis. The Partnership intends to pursue this objective principally through (i) the pursuit of strategic acquisitions which capitalize on the Partnership's acquisition expertise in the highly fragmented propane and home heating oil distribution industries, (ii) the realization of operating efficiencies in existing and acquired operations, (iii) a focus on customer growth and retention, (iv) the continued enhancement in public awareness of the Partnership's quality brands and (v) the sale of rationally related products. In the Partnership's New York and Mid-Atlantic regions, the home heating oil segment operates almost exclusively under the name of "Petro," rather than the acquired brand names previously in use. The Partnership has been building the "Petro" brand name by focusing on delivering premium service to its customers. As the largest retail distributor of home heating oil and a leading retail distributor of propane in the United States, the Partnership is able to realize economies of scale in operating, marketing, information technology and other areas by spreading costs over a larger customer base. Additionally, the heating oil segment is using communication and computer technology that is generally not used by its competitors, which has allowed it to realize operating efficiencies. Recent Acquisitions In August 2001, the Partnership completed the purchase of Meenan Oil Co., Inc., believed to be the third largest home heating oil dealer in the United States for $131.8 million. During 2001, the Partnership also purchased twelve other heating oil dealers for $52.0 million. In addition, the Partnership also acquired nine retail propane dealers for $60.8 million. 5
Propane Operations - ---------- Retail propane operations are located in the following states: <TABLE> <S> <C> <C> <C> <C> Connecticut Illinois Kentucky Ohio (continued) Florida Stamford Scales Mound Dry Ridge Kenton Bronson Hartford Glencoe Lancaster Chiefland Indiana Prospect Lewisburg Crystal River Maine Batesville Shelbyville Lynchburg High Springs Fairfield Bedford Macon Melbourne Fryeburg Bluffton Michigan Maumee New Smyrna Beach Wells College Corner Big Rapids Mt. Orab Old Town Windham Columbia City Charlotte Mt. Vernon Silver Spring Decatur Chassell North Star Massachusetts Ferdinand Coleman Ripley Belchertown Germfask Hillsdale Sabina GEORGIA ------- Rochdale Greencastle Kalamazoo Waverly Blakely Westfield Jeffersonville Marquete West Union Swansea Lawrence Munising Linton Owosso West Virginia New Hampshire Madison Somerset Center (from Ironton, OH) (from Fryeburg, ME) New Salisbury Vassar N. Manchester Wisconsin New Jersey N. Webster Minnesota Block River Falls Maple Shade Orland Minnesota City Blair Tuckahoe Portland Caledonia Remington Ohio Chetek New York Richmond Bowling Green Eau Claire Addison Rushville Cincinnati LaCrosse Poughkeepsie Seymour Columbiana Mauston Washingtonville Shirley Columbus Minocqua Bridgehampton Steffen Defiance Mondoui Sulphur Springs Deshler Owen Pennsylvania Versailles Dover Prairie Du Chien Hazleton Warren Hebron Richland Cenre Wellsboro Waterloo Ironton Shell Lake Wind Gap Winamac Jamestown Tomah Rhode Island Davisville </TABLE> In addition to selling propane, the segment also sells, installs and services equipment related to propane distribution, including heating and cooking appliances. At several Midwest locations bottled water is sold and water conditioning equipment is either sold or leased. Typical branch locations consist of an office, an appliance showroom and a warehouse and service facility, with one or more 12,000 to 30,000 gallon bulk storage tanks. Satellite facilities typically contain only storage tanks. The distribution of propane at the retail level for the most part involves large numbers of small deliveries averaging 100 to 150 gallons to each customer. Retail deliveries of propane are usually made to customers by means of the propane segment's fleet of bobtail and rack trucks. Currently the propane segment has 550 bobtail and rack trucks. Propane is pumped from a bobtail truck, which generally holds 2,000 to 3,000 gallons, into a stationary storage tank at the customer's premises. The capacity of these tanks ranges from approximately 24 gallons to approximately 1,000 gallons. The propane segment also delivers propane to retail customers in portable cylinders, which typically are picked up and replenished at distribution locations, then returned to the retail customer. To a limited extent, the propane segment also delivers propane to certain end-users of propane in larger trucks known as transports. These trucks have an average capacity of approximately 9,000 gallons. End-users receiving transport deliveries include industrial customers, large-scale heating accounts, such as local gas utilities that use propane as a supplemental fuel to meet peak demand requirements, and large agricultural accounts that use propane for crop drying and space heating. 6
Customers - --------- During 2001, the propane segment grew its residential customer base by less than 0.5% through internal marketing. In addition, the propane segment completed nine acquisitions with approximately 63,000 customers with annual volumes of 34.7 million gallons. Approximately 65% of the propane segment's retail sales are made to residential customers and 35% of retail sales are made to commercial and agricultural customers. Sales to residential customers in 2001 accounted for approximately 71% of propane gross profit on propane sales, reflecting the higher-margin nature of this segment of the market. In excess of 95% of the retail propane customers lease their tanks from the propane segment. In most states, due to fire safety regulations, a leased tank may only be refilled by the propane distributor that owns that tank. The inconvenience associated with switching tanks greatly reduces a propane customer's tendency to change distributors. Over half of the propane segment's residential customers receive their propane supply under an automatic delivery system. The amount delivered is based on weather and historical consumption patterns. Thus, the automatic delivery system eliminates the customer's need to make an affirmative purchase decision. The propane segment provides emergency service 24 hours a day, seven days a week, 52 weeks a year. Competition - ----------- The propane industry is highly competitive; however, long-standing customer relationships are typical of the retail propane industry. The ability to compete effectively within the propane industry depends on the reliability of service, responsiveness to customers and the ability to maintain competitive prices. The propane segment believes that its superior service capabilities and customer responsiveness differentiates it from many of its competitors. Branch operations offer emergency service 24 hours a day, seven days a week, 52 weeks a year. Competition in the propane industry is highly fragmented and generally occurs on a local basis with other large full-service multi-state propane marketers, smaller local independent marketers and farm cooperatives. Based on industry publications, the Partnership believes that the ten largest multi-state marketers, including its propane segment, account for approximately 35% of the total retail sales of propane in the United States, and that no single marketer has a greater than 10% share of the total retail market in the United States. Most of the propane segment's branches compete with five or more marketers or distributors. The principal factors influencing competition among propane marketers are price and service. Each retail distribution outlet operates in its own competitive environment. While retail marketers locate in close proximity to customers to lower the cost of providing delivery and service, the typical retail distribution outlet has an effective marketing radius of approximately 35 miles. In addition, propane competes primarily with electricity, natural gas and fuel oil as an energy source on the basis of price, availability and portability. In certain parts of the country, propane is generally less expensive to use than electricity for space heating, water heating, clothes drying and cooking. Propane is generally more expensive than natural gas, but serves as an alternative to natural gas in rural and suburban areas where natural gas is unavailable or portability of product is required. The expansion of natural gas into traditional propane markets has historically been inhibited by the capital costs required to expand distribution and pipeline systems. Although the extension of natural gas pipelines tends to displace propane distribution in the areas affected, the Partnership believes that new opportunities for propane sales arise as more geographically remote areas are developed. Although propane is similar to fuel oil in space heating and water heating applications, as well as in market demand and price, propane and fuel oil have generally developed their own distinct geographic markets. Because furnaces that burn propane will not operate on fuel oil, a conversion from one fuel to the other requires the installation of new equipment. 7
Home Heating Oil Operations - ---------- The Partnership's heating oil segment serves approximately 530,000 customers in the Northeast and Mid-Atlantic states. In addition to selling home heating oil, the heating oil segment installs and repairs heating and air conditioning equipment. To a limited extent, it also markets other petroleum products. During the twelve months ended September 30, 2001, the total sales in the heating oil segment were comprised of approximately 79% from sales of home heating oil; 15% from the installation and repair of heating equipment; and 6% from the sale of other petroleum products. The heating oil segment provides home heating equipment repair service 24 hours a day, seven days a week, 52 weeks a year, generally within four hours of a request. It also regularly provides various service incentives to obtain and retain customers. The heating oil segment is consolidating its operations under one brand name, which it is building by employing an upgraded, professionally trained and managed sales force, together with a professionally developed marketing campaign, including radio and print advertising media. The heating oil segment has a nationwide toll free telephone number, 1-800-OIL-HEAT, which it believes helps build customer awareness and brand identity. As a result of a major strategic study, in 1996 the heating oil segment began to implement an operational restructuring program designed to take advantage of its size within the home heating oil industry. This program involves regionalization of its home heating oil operations into three profit centers, which allows it to operate more efficiently. In addition, this program enables the heating oil segment to access developments in communication and computer technology that are in use by other large distribution businesses, but are generally not used by other retail heating oil companies. This program is designed to reduce operating costs, improve customer service and establish a brand image among heating oil consumers. As part of the implementation of this operational restructuring program, in April 1996 the heating oil segment opened a regional customer service center on Long Island, New York. This state-of-the-art facility currently conducts all activities that interface with its approximately 125,000 Long Island and New York City home heating oil customers, including sales, customer service, credit and accounting. Since the establishment of this customer service center, eight full-function branches were consolidated into four strategically located delivery and service depots to serve the heating oil segment's customers more efficiently. Furthermore, in keeping with the focus of its operating strategy, the heating oil segment has continued to reorganize select branch and corporate responsibilities in order to eliminate redundant functions and regionalize responsibilities where they can best serve customers and the home heating oil business. Customers - --------- The heating oil segment currently markets in the following states: <TABLE> <S> <C> <C> New York Massachusetts New Jersey Bronx, Queens and Kings Counties Boston (Metropolitan) Camden Dutchess County Northeastern Massachusetts Lakewood Staten Island (Centered in Lawrence) Newark (Metropolitan) Eastern Long Island Worcester North Brunswick Western Long Island Rockaway Westchester/Putnam Counties Trenton Orange County Connecticut Pennsylvania Rhode Island Bridgeport--New Haven Allentown Providence Litchfield County Berks County Newport Fairfield County (Centered in Reading) Bucks County Maryland/Virginia/D.C. (Centered in Southampton) Arlington Lebanon County Baltimore (Centered in Palmyra) Washington, D.C. (Metropolitan) Philadelphia </TABLE> 8
During the twelve months ended September 30, 2001, approximately 86% of the heating oil segment's heating oil sales were made to homeowners, with the remainder to industrial, commercial and institutional customers. In 2001, the heating oil segment experienced net attrition of 0.7%, representing gains of approximately 13.1% and losses of 13.8%. Net account growth for the heating oil segment for fiscal 2000 was 1.3%. Attrition of existing customers had averaged approximately 5% per year over the five years through 1999. Gross customer losses are the result of various factors, including customer relocation, price, natural gas conversions and credit problems. Customer gains are a result of marketing and service programs and other incentives. While the heating oil segment often loses customers when they move from their homes, it is able to retain a majority of these homes by obtaining the purchaser as a customer. Approximately 90% of the heating oil customers receive their home heating oil under an automatic delivery system without the customer having to make an affirmative purchase decision. These deliveries are scheduled by computer, based upon each customer's historical consumption patterns and prevailing weather conditions. The heating oil segment delivers home heating oil approximately six times during the year to the average customer. The segment's practice is to bill customers promptly after delivery. Approximately 33% of its customers are on a budget payment plan, whereby their estimated annual oil purchases and service contract are paid for in a series of equal monthly payments over a twelve month period. Approximately 39% of the heating oil sales are made to individual customers under agreements pre-establishing a fixed or maximum price per gallon over a twelve month period. The fixed or maximum price at which home heating oil is sold to these price plan customers is generally renegotiated prior to the heating season of each year based on current market conditions. The segment currently enters into derivative instruments (futures, options, collars and swaps) covering a substantial majority of the heating oil it sells to these price plan customers in advance and at a fixed cost. Should events occur after a price plan customer's price is established that increases the cost of home heating oil above the amount anticipated, margins for the price plan 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 price plan 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. Competition - ----------- The heating oil segment competes with distributors offering a broad range of services and prices, from full service distributors, like itself, to those offering delivery only. Long-standing customer relationships are typical in the industry. Like most companies in the home heating oil business, the heating oil segment provides home heating equipment repair service on a 24-hour a day basis. This tends to build customer loyalty. As a result of these factors, it may be difficult for the heating oil segment to acquire new retail customers, other than through acquisitions. In some instances homeowners have formed buying cooperatives that seek to purchase fuel oil from distributors at a price lower than individual customers are otherwise able to obtain. The heating oil segment also competes for retail customers with suppliers of alternative energy products, principally natural gas, propane, and electricity. The rate of conversion from the use of home heating oil to natural gas is primarily affected by the relative prices of the two products and the cost of replacing an oil fired heating system with one that uses natural gas. The heating oil segment believes that approximately 1% of its home heating oil customer base annually converts from home heating oil to natural gas. 9
Natural Gas and Electricity Operations - ---------- The Partnership's natural gas and electricity segment serves approximately 50,000 customers in four states and the District of Columbia. In 2001, the sales were comprised of 81% from sales of approximately 66.5 million therms of natural gas and 19% from sales of approximately 232 million kilowatts of electricity. The initial business strategy of TG&E was to increase its market share in deregulated natural gas and electricity. Its current business plan is to expand its market share by concentrating on obtaining new natural gas customers in areas where it believes they will be profitable and stable. As a result, TG&E ceased serving approximately 25,000 customers who bought only electricity. TG&E will continue to market the resale of electricity to existing natural gas customers while continuing to look for future opportunities. Customers - --------- TG&E currently markets in the following states: New York New Jersey Maryland -------- ---------- -------- Buffalo Central New Jersey Baltimore Orange County Southern New Jersey Rockland County Washington, D.C. Westchester County Florida ---------------- New York City ------- In 2001, approximately 98% of TG&E sales were made to households, with the remainder to industrial and commercial customers. New accounts are currently obtained through the utilization of a third party telemarketing firm on a commission basis. Approximately 55% of TG&E's customers are on a budget plan, whereby their estimated purchases are paid for in a series of equal monthly payments over a twelve month period. Competition - ----------- TG&E's primary competition is with the local utility company. In many markets, however, the utility prefers that a customer buys from an independent reseller in that the utility tariff structure is commodity neutral. The utility makes its money by transporting the commodity and not from the sale of the commodity. Other competitors fall into two distinct categories; national or local marketing companies. National marketing companies are generally pipeline, producer or utility subsidiaries. These companies have mainly focused their attention on large commercial and industrial customers. Local companies typically only service one or two utility markets. These companies generally do not have the ability to offer equipment service and may be capital constrained. 10
Suppliers and Supply Arrangements - --------------------------------- Propane Segment - --------------- The propane segment obtains propane from over 20 sources, all of which are domestic or Canadian companies, including BP Canada Energy Marketing Corp., Chevron-Texaco, Dynegy Inc., Ferrell North America, Gas Supply Resources, Inc., Kinetic Resources, U.S.A., Marathon Oil Company, Markwest Hydrocarbons, ExxonMobil LPG, Sea-3 Inc., Shell Canada Limited, Sun Mid America Marketing & Refining, Enterprise Products Partners, and Phillips. Supplies from these sources have traditionally been readily available, although there is no assurance that supplies of propane will continue to be readily available. Substantially all of the propane supply for the Northeast retail operations is purchased under annual or longer term supply contracts that generally provide for pricing in accordance with market prices at the time of delivery. Some of the contracts provide for minimum and maximum amounts of propane to be purchased. During 2001, none of the propane segment's Northeast suppliers accounted for more than 10% of its Northeast volume. The propane segment typically supplies its Midwest retail and wholesale operations by a combination of: (1) spot purchases from suppliers at Mont Belvieu, Texas, that are transported by pipeline to the propane segment's 21 million gallon underground storage facility in Seymour, Indiana, and then delivered to the Midwest branches; and (2) purchases from a number of Midwest refineries that are transported by truck to the branches either directly or via the Seymour facility. Most of the refinery and terminal purchases are purchased under market based contracts. The Seymour facility is located on the TEPPCO Partners, L.P. pipeline system. The pipeline is connected to the Mont Belvieu, Texas storage facilities and is one of the largest conduits of supply for the U.S. propane industry. The Seymour facility allows the propane segment to buy and store large quantities of propane during periods of low demand that generally occur during the summer months. The Partnership believes that this ability allows it to achieve cost savings to an extent generally not available to competitors in the propane segment's Midwest markets and provides the Partnership with a security of supply in times of high demand that is not available to the competition. The Partnership believes that its diversification of suppliers will enable it to purchase all of its supply needs at market prices if supplies are interrupted from any of these sources without a material disruption of its operations. The propane segment's Florida and Georgia operations are supplied by annual contracts at market pricing. Suppliers there are the same as some of the above, including Dynegy Inc., Sea-3 Inc. and Chevron-Texaco. The financial hedging instruments of Star Gas Propane are limited to major companies. One of the companies contracted to provide Star Gas Propane with hedging instruments, Enron has filed for bankruptcy on December 2, 2001. Star Gas has contracts with Enron to hedge 19.2 million gallons of propane purchases through March, 2002. The market value of these contracts, on December 1, 2001, would have resulted in Star Gas Propane owing Enron approximately $2.4 million. The market price per gallon of propane would have to increase almost 73% or 20.6(cent) per gallon in order for the company to be in a position of creditor with Enron. Heating Oil Segment - ------------------- The heating oil segment obtains fuel oil in either barge, pipeline, or truckload quantities, and has contracts with over 80 terminals for the right to temporarily store heating oil at facilities it does not own. Purchases are made under supply contracts or on the spot market. The home heating oil segment has market price based contracts for substantially all of 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. The segment's current suppliers are: Amerada Hess Corporation; Citgo Petroleum Corp.; Coastal New York; Equiva Trading Co., Global Companies, LLC; Transmontaigne Product Services Inc.; Mieco, Inc.; Mobil Oil Corporation; Northville Industries, Sprague Energy; Sun Oil Company; and Tosco Refining Co. Supply contracts typically have terms of 12 months. All of the supply contracts provide for maximum and in some cases minimum quantities. In most cases the supply contracts do not establish in advance the price of fuel oil. This price, like the price to most of its home heating oil customers, is based upon market prices at the time of delivery. The Partnership believes that its policy of contracting for substantially all of its supply needs with diverse and reliable sources will enable it to obtain sufficient product should unforeseen shortages develop in worldwide supplies. The Partnership also believes that relations with its current suppliers are satisfactory. 11
Natural Gas and Electricity Operations - -------------------------------------- The TG&E segment purchases natural gas at either the well-head, the pipeline pooling point or delivered to the city gate. Purchases are at market based pricing from a variety of different suppliers. The segment's current suppliers are: Crown Energy Services, Inc., Duke Energy Trading & Marketing, Inc., Equitable Energy, LLC., Mirant Americas Energy Marketing, L.P., Sempra Energy Trading Corp., Scana Energy Marketing, Inc., Sprague Energy Corp. and Texaco Natural Gas, Inc. All of the segment's electricity requirements are currently purchased at market from Niagara Mohawk Energy Marketing, Inc. and New York Independent System Operator. During fiscal 2001, the majority of TG&E's electric purchases were made under fixed price arrangements. Employees As of September 30, 2001, the propane segment had 915 full-time employees, of whom 63 were employed by the corporate office and 852 were located in branch offices. Of these 852 branch employees, 286 were managerial and administrative; 393 were engaged in transportation and storage and 173 were engaged in field servicing. Approximately 69 of the segment's employees are represented by six different local chapters of labor unions. Management believes that its relations with both its union and non-union employees are satisfactory. As of September 30, 2001, the home heating oil segment had 3,155 employees, of whom 879 were office, clerical and customer service personnel; 1,146 were heating equipment repairmen; 472 were oil truck drivers and mechanics; 343 were management and staff and 315 were employed in sales. In addition, approximately 350 seasonal employees are rehired annually to support the requirements of the heating season. The heating oil segment has approximately 1,100 employees, which are represented by 16 different local chapters of labor unions. Management believes that its relations with both its union and non-union employees are satisfactory. As of September 30, 2001, the TG&E segment had 49 employees, of whom 37 were office, clerical and customer service personnel; 10 were management and staff and 2 were employed in sales. Government Regulations The Partnership is subject to various federal, state and local environmental, health and safety laws and regulations. Generally, these laws impose limitations on the discharge of pollutants and establish standards for the handling of solid and hazardous wastes. These laws include the Resource Conservation and Recovery Act, the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), the Clean Air Act, the Occupational Safety and Health Act, the Emergency Planning and Community Right to Know Act, the Clean Water Act and comparable state statutes. CERCLA, also known as the "Superfund" law, imposes joint and several liabilities without regard to fault or the legality of the original conduct on certain classes of persons that are considered to have contributed to the release or threatened release of a hazardous substance into the environment. Propane is not a hazardous substance within the meaning of CERCLA. However, certain automotive waste products generated by the Partnership's fleet could subject the Partnership to liability under CERCLA. These laws and regulations could result in civil or criminal penalties in cases of non-compliance or impose liability for remediation costs. To date, the Partnership has not been named as a party to any litigation in which it is alleged to have violated or otherwise incurred liability under any of the above laws and regulations. National Fire Protection Association Pamphlets No. 54 and 58, which establish rules and procedures governing the safe handling of propane, or comparable regulations, have been adopted as the industry standard in all of the states in which the Partnership operates. In some states these laws are administered by state agencies, and in others they are administered on a municipal level. With respect to the transportation of propane by truck, the Partnership is subject to regulations promulgated under the Federal Motor Carrier Safety Act. These regulations cover the transportation of hazardous materials and are administered by the United States Department of Transportation. The Partnership conducts ongoing training programs to help ensure that its operations are in compliance with applicable regulations. The Partnership maintains various permits that are necessary to operate some of its facilities, some of which may be material to its operations. The Partnership believes that the procedures currently in effect at all of its facilities for the handling, storage and distribution of propane are consistent with industry standards and are in compliance in all material respects with applicable laws and regulations. 12
For acquisitions that involve the purchase of real estate, the Partnership conducts a due diligence investigation to attempt to determine whether any regulated substance has been sold from or stored on, any of that real estate prior to its purchase. This due diligence includes questioning the seller, obtaining representations and warranties concerning the seller's compliance with environmental laws and performing site assessments. During this due diligence the Partnership's employees, and, in certain cases, independent environmental consulting firms review historical records and databases and conduct physical investigations of the property to look for evidence of hazardous substances, compliance violations and the existence of underground storage tanks. Future developments, such as stricter environmental, health or safety laws and regulations thereunder, could affect Partnership operations. It is not anticipated that the Partnership's compliance with or liabilities under environmental, health and safety laws and regulations, including CERCLA, will have a material adverse effect on the Partnership. To the extent that there are any environmental liabilities unknown to the Partnership or environmental, health or safety laws or regulations are made more stringent, there can be no assurance that the Partnership's results of operations will not be materially and adversely affected. Total Gas & Electric is an authorized supplier of electric and/or gas in the states of New York, New Jersey, Maryland, Connecticut, Florida, Pennsylvania and the District of Columbia, which allow consumers to choose their electric and/or gas supplier. TG&E is either licensed and/or registered to serve as an alternative competitive supplier in each state. The incumbent utility continues to serve as the transmission and distribution company, which delivers the commodity, and in many instances continues to send customers the monthly bill for the energy delivered. However, TG&E offers an alternative for the commodity portion of the consumers bill. As an alternative supplier, TG&E is subject to oversight by state public utility commissions, including licensing or registration requirements, information regarding rates and conditions of service, and in some instances annual filing requirements regarding numbers of customers, numbers of complaints, energy portfolio components, and other information relative to the company's conduct of operations. Total Gas & Electric currently has been subject to investigations by the Attorneys General of New York and New Jersey and an informal investigation by the Pennsylvania Public Utility Commission into its practices for soliciting customers. Total Gas & Electric has been in discussions with these agencies to resolve their investigations, has settled the New Jersey investigation and anticipates that the remaining investigations will be satisfactorily resolved. Total Gas & Electric has adopted a comprehensive sales compliance program to comply with applicable regulations. 13
ITEM 2. PROPERTIES Propane Segment - --------------- As of September 30, 2001, the propane segment owned 93 of its 112 branch locations and 47 of its 54 satellite storage facilities and leased the balance. In addition, it owns the Seymour facility, in which it stores propane for itself and third parties. The propane segment's corporate headquarters are located in Stamford, Connecticut and is leased. The transportation of propane requires specialized equipment. The trucks used for this purpose carry specialized steel tanks that maintain the propane in a liquefied state. As of September 30, 2001, Star Gas Propane had a fleet of 17 tractors, 28 transport trailers, 550 bobtail and rack trucks and 507 other service and pick-up trucks, the majority of which are owned. As of September 30, 2001, the propane segment owned 389 bulk storage tanks with typical capacities of 12,000 to 35,000 gallons; approximately 280,000 stationary customer storage tanks with typical capacities of 24 to 1,000 gallons; and 35,000 portable propane cylinders with typical capacities of 5 to 24 gallons. The Partnership's obligations under its borrowings are secured by liens and mortgages on all of its real and personal property. Heating Oil Segment - ------------------- The heating oil segment provides services to its customers from 35 branches/depots and 31 satellites, 27 of which are owned and 39 of which are leased, in 29 marketing areas in the Northeast and Mid-Atlantic Regions of the United States. The heating oil's corporate headquarters is located in Stamford, Connecticut and is leased. As of September 30, 2001, the heating oil segment had a fleet of 1,239 truck and transport vehicles the majority of which are owned and 1,444 services vans the majority of which are leased. The Partnership's obligations under its borrowings are secured by liens and mortgages on all of its real and personal property. TG&E Segment - ------------ The natural gas and electric reseller segment provides services to its customers from its Fort Lauderdale, Florida corporate headquarters which is leased. This segment does not have any vehicles. The Partnership believes its existing facilities are maintained in good condition and are suitable and adequate for its present needs. In addition, there are numerous comparable facilities available at similar rentals in each of its marketing areas should they be required. ITEM 3. LEGAL PROCEEDINGS - LITIGATION Litigation - ---------- The Partnership's operations are subject to all operating hazards and risks normally incidental to handling, storing and transporting and otherwise providing for use by consumers of combustible liquids such as propane and home heating oil. As a result, at any given time the Partnership is a defendant in various legal proceedings and litigation arising in the ordinary course of business. The Partnership maintains insurance policies with insurers in amounts and with coverages and deductibles as the general partner believes are reasonable and prudent. However, the Partnership cannot assure that this insurance will be adequate to protect it from all material expenses related to potential future claims for personal and property damage or that these levels of insurance will be available in the future at economical prices. In addition, the occurrence of an explosion may have an adverse effect on the public's desire to use the Partnership's products. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the security holders of the Partnership during the fourth quarter ended September 30, 2001. 14
PART II ITEM 5. MARKET FOR REGISTRANT'S UNITS AND RELATED MATTERS The common units, representing common limited partner interests in the Partnership, are listed and traded on the New York Stock Exchange, Inc. ("NYSE") under the symbol "SGU". The common units began trading on the NYSE on May 29, 1998. Previously, the common units had traded on the NASDAQ National Market under the symbol "SGASZ." The Partnership's senior subordinated units began trading on the NYSE on March 29, 1999 under the symbol "SGH." The Senior Subordinated Units became eligible to receive distributions in February 2000, and the first distribution was made in August 2000. The following tables set forth the high and low closing price ranges for the common and senior subordinated units and the cash distribution declared on each unit for the fiscal 2000 and 2001 quarters indicated. <TABLE> <CAPTION> SGU - Common Unit Price Range ----------------------------- Distributions High Low Declared Per Unit ------------------ ----------------- ----------------- Quarter Ended 2000 2001 2000 2001 2000 2001 ---- ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> <C> December 31, $16.88 $17.81 $12.88 $15.50 $0.575 $0.575 March 31, $15.88 $19.00 $13.25 $16.94 $0.575 $0.575 June 30, $16.00 $21.68 $13.00 $18.70 $0.575 $0.575 September 30, $17.94 $21.45 $15.19 $18.20 $0.575 $0.575 <CAPTION> SGH - Senior Subordinated Unit Price Range ------------------------------------------------- Distributions High Low Declared Per Unit -------------------- ----------- ----------------- Quarter Ended 2000 2001 2000 2001 2000 2001 ---- ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> <C> December 31, $ 9.00 $ 9.13 $ 4.88 $ 8.00 - $0.250 March 31, $ 6.12 $17.10 $ 4.38 $ 9.19 - $0.575 June 30, $ 6.75 $18.85 $ 4.50 $16.85 - $0.575 September 30, $ 9.19 $22.50 $ 6.06 $19.25 $0.250 $0.575 </TABLE> As of September 30, 2001, there were approximately 755 holders of record of common units, and approximately 111 holders of record of senior subordinated units. There is no established public trading market for the Partnership's 345,364 Junior Subordinated Units and 325,729 general partner units. In general, the Partnership distributes to its partners on a quarterly basis, all of its Available Cash in the manner described below. Available Cash is defined for any of the Partnership's fiscal quarters, as all cash on hand at the end of that quarter, less the amount of cash reserves that are necessary or appropriate in the reasonable discretion of the general partner to (i) provide for the proper conduct of the business; (ii) comply with applicable law, any of its debt instruments or other agreements; or (iii) provide funds for distributions to the common unitholders and the senior subordinated unitholders during the next four quarters, in some circumstances. The general partner may not establish cash reserves for distributions to the senior subordinated units unless the general partner has determined that the establishment of reserves will not prevent it from distributing the minimum quarterly distribution on all common units and any common unit arrearages for the next four quarters. The full definition of Available Cash is set forth in the Agreement of Limited Partnership of the Partnership. The information concerning restrictions on distributions required in this section is incorporated herein by reference to the Partnership's Consolidated Financial Statements, which begin on page F-1 of this Form 10-K. 15
ITEM 6. SELECTED HISTORICAL FINANCIAL AND OPERATING DATA The following table sets forth selected historical and other data of the Partnership and should be read in conjunction with the more detailed financial statements included elsewhere in this report. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The Selected Financial Data is derived from the financial information of the Partnership and should be read in conjunction therewith. (in thousands, except per unit data) <TABLE> <CAPTION> Fiscal Year Ended September 30, ------------------------------------------------------------------ Statement of Operations Data: 1997 1998 1999/(c)/ 2000 2001 ---- ---- ------ ---- ---- <S> <C> <C> <C> <C> <C> Sales $ 135,159 $ 111,685 $ 224,020 $ 744,664 $ 1,085,973 Costs and expenses: Cost of sales 72,211 49,498 131,649 501,589 771,317 Delivery and branch 36,427 37,216 86,489 156,862 200,059 General and administrative 7,113 6,336 11,717 19,862 35,771 TG&E customer acquisition - - - 2,082 1,868 Unit compensation - - - 649 3,315 Depreciation and amortization 10,242 11,462 22,713 34,708 44,396 --------- --------- --------- --------- ----------- Operating income (loss) 9,166 7,173 (28,548) 28,912 29,247 Interest expense, net 6,966 7,927 15,435 26,784 33,727 Amortization of debt issuance costs 163 176 347 534 737 --------- --------- --------- --------- ----------- Income (loss) before income taxes, minority interest and cumulative effect of change in accounting principle 2,037 (930) (44,330) 1,594 (5,217) Minority interest in net loss of TG&E - - - 251 - Income tax expense (benefit) 25 25 (14,780) 492 1,498 --------- --------- --------- --------- ----------- Income (loss) before cumulative change in accounting principle 2,012 (955) (29,550) 1,353 (6,715) Cumulative effect of change in accounting principle for adoption of SFAS No. 133, net of income taxes - - - - 1,466 --------- --------- --------- --------- ----------- Net income (loss) $ 2,012 $ (955) $ (29,550) $ 1,353 $ (5,249) ========= ========= ========= ========= =========== Weighted average number of limited partner units 5,271 6,035 11,447 18,288 22,439 Per Unit Data: Net income (loss) per unit/(a)/ $ 0.37 $ (0.16) $ (2.53) $ 0.07 $ (0.23) Cash distribution declared per common unit $ 2.20 $ 2.20 $ 2.25 $ 2.30 $ 2.30 Cash distribution declared per senior sub. unit $ - $ - $ - $ 0.25 $ 1.975 Balance Sheet Data (end of period): Current assets $ 14,165 $ 17,947 $ 86,868 $ 126,990 $ 185,262 Total assets 147,469 179,607 539,344 618,976 898,819 Long-term debt 85,000 104,308 276,638 310,414 457,086 Partners' Capital 51,578 57,347 150,176 139,178 198,264 Summary Cash Flow Data: Net Cash provided by operating activities $ 18,964 $ 9,264 $ 10,795 $ 20,364 $ 63,144 Net Cash used in investing activities (4,905) (13,276) (2,977) (65,172) (256,134) Net Cash provided by (used in) financing activities (14,276) 4,238 (4,441) 51,226 199,308 Other Data: Earnings before interest, taxes, depreciation and amortization, TG&E customer acquisition expense and unit compensation expense, less net gain (loss) on sales of fixed assets (EBITDA) before the impact of SFAS No. 133/(b)/ $ 19,703 $ 18,906 $ (5,752) $ 66,210 $ 85,004 Retail propane gallons sold 94,893 98,870 99,457 107,557 137,031 Heating oil gallons sold - - 74,039 345,684 427,168 </TABLE> 16
ITEM 6. SELECTED HISTORICAL FINANCIAL AND OPERATING DATA (Continued) (a) Net income (loss) per unit is computed by dividing the limited partners' interest in net income (loss) by the weighted average number of limited partner units outstanding. (b) EBITDA is defined as operating income (loss) plus depreciation and amortization, TG&E customer acquisition expense and unit compensation expense, less net gain (loss) on sales of fixed assets before the impact of SFAS No. 133. 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. EBITDA is calculated for the fiscal years ended September 30 as follows: <TABLE> <CAPTION> 1997 1998 1999 2000 2001 ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> Operating income (loss) $ 9,166 $ 7,173 $ (28,548) $ 28,912 $ 29,247 Plus: Depreciation and amortization 10,242 11,462 22,713 34,708 44,396 TG&E customer acquisition expense - - - 2,082 1,868 Unit compensation expense - - - 649 3,315 Net (gain) loss on sales of fixed assets 295 271 83 (141) 26 Impact of SFAS No. 133 - - - - 6,152 ---------- --------- ---------- --------- ---------- EBITDA $ 19,703 $ 18,906 $ (5,752) $ 66,210 $ 85,004 ========== ========= ========== ========= ========== </TABLE> (c) The results of operations for the year ended September 30, 1999 include Petro's results of operations from March 26, 1999. Since Petro was acquired after the heating season, the results for the year ended September 30, 1999 include expected third and fourth fiscal quarters losses but do not include the profits from the heating season. Accordingly, results of operations for the year ended September 30, 1999 presented are not indicative of the results to be expected for a full year. 17
ITEM 7. 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, natural gas and electricity 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 year ended September 30, 1999 only include Petro's results from March 26, 1999. Since Petro was acquired after the heating season, the results for the year ended September 30, 1999 include expected third and fourth fiscal quarters losses but do not include the profits from the heating season. The Total Gas and Electric (TG&E) acquisition was made on April 7, 2000. Accordingly, the results of operations for the year ended September 30, 2001 include TG&E's results for the entire period whereas the results for the previous corresponding fiscal year only include TG&E's results of operations for only approximately six months. The primary use of heating oil, propane and natural gas is for space 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. The Partnership adopted SFAS No. 133 on October 1, 2000 and has since recorded its derivatives at fair market value. As a result, net income for 2001 was $4.7 million less than what it would have been had the Standard not been adopted. The $4.7 million is comprised of $6.2 million additional cost of goods sold offset by $1.5 million of net income attributable to the cumulative effect of change in accounting principle. The effect of the Standard has no impact in how the Partnership evaluates its ability to make the minimum quarterly distribution. 18
FISCAL YEAR ENDED SEPTEMBER 30, 2001 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30, 2000 - ------------------------------------------------ Volume For fiscal 2001, retail volume of home heating oil and propane increased 111.0 million gallons, or 24.5%, to 564.2 million gallons, as compared to 453.2 million gallons for the fiscal 2000. This increase was due to an additional 81.5 million gallons provided by the heating oil segment and a 29.5 million gallon increase in the propane segment. Volume increased in the heating oil and propane segments largely due to the impact of colder temperatures and as a result of additional volume provided by acquisitions. The propane segment estimates that its volume was adversely impacted by approximately 7.5 million gallons due to consumer conservation. Temperatures in the Partnership's areas of operations were an average of 12.0% colder than in the prior year and approximately 2% colder than normal. Sales For fiscal 2001, sales increased $341.3 million, or 45.8%, to $1.1 billion, as compared to $744.7 million for fiscal 2000. This increase was attributable to $197.1 million provided by the home heating oil segment, a $76.2 million increase in the propane segment and by a $68.1 million of increased TG&E sales. Sales rose in both the heating oil and propane segments due to increased retail volume and to a lesser extent from increased selling prices. 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 $22.7 million and by $7.1 million in the propane division due to increases in the sales of rationally related products including heating, air conditioning and water softening equipment installation and service. Cost of Sales For fiscal 2001, cost of product increased $269.7 million, or 53.8%, to $771.3 million, as compared to $501.6 million for fiscal 2001. This increase was due to $160.5 million of additional cost of product at the home heating segment, $61.3 million of increased TG&E cost of product and a $47.9 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 retail volumes sales and as a result of higher supply cost. In addition, cost of product increased by $6.2 million due to the impact of SFAS No. 133 on 2001 results. While both selling prices and supply cost increased on a per gallon basis, the increase in selling prices was greater than the increase in supply costs (excluding the impact of SFAS #133), which resulted in an increase in per gallon margins. Cost of sales for both the heating oil and propane segments also increased due to additional sales of rationally related products and as a result of additional service cost due to the colder temperatures. Delivery and Branch Expenses For fiscal 2001, delivery and branch expenses increased $43.2 million, or 27.5%, to $200.1 million, as compared to $156.9 million for fiscal 2000. This increase was due to an additional $30.1 million of delivery and branch expenses at the heating oil segment, and a $13.0 million increase in delivery and branch expenses for the propane segment. Delivery and branch expenses increased both at the heating oil and propane segments due to additional operating cost associated with higher retail volume sales, inflation and for additional operating cost of acquired companies. Depreciation and Amortization For fiscal 2001, depreciation and amortization expenses increased $9.7 million, or 27.9%, to $44.4 million, as compared to $34.7 million for fiscal 2000. This increase was primarily due to additional depreciation and amortization for heating oil and propane acquisitions and $1.5 million of increased depreciation and amortization expenses for TG&E. General and Administrative Expenses For fiscal 2001, general and administrative expenses increased $15.9 million, or 80.0%, to $35.8 million, as compared to $19.9 million for fiscal 2000. This increase was primarily due to $10.7 million of additional TG&E general and administrative expenses and a $3.3 million increase in general and administrative expenses at the Partnership level. The Partnership level increase was primarily due to an accrual for compensation earned for unit appreciation rights previously granted and for professional fees incurred for the recruitment of certain executive positions. General and administrative expenses increased $1.9 million in total for the heating oil and propane segments due to increased incentive compensation and for acquisition related expenditures. 19
The $10.7 million increase in expenses at TG&E was largely due to a $6.4 million provision to increase its allowance for bad debts (representing a $6.0 million increase over the prior year provision), $2.4 million of start up and organizational expenses and inclusion of a full year of general and administration expense. Since its acquisition, TG&E has struggled with customer credit deficiencies and problems collecting its receivables. TG&E currently has more than 50,000 terminated customers who collectively owe $15.5 million, virtually all of which is greater than 90 days old. This balance includes $5.3 million of accounts receivable that predated TG&E's acquisition by the Partnership. These pre-acquisition receivables were assigned no value and are not reflected on TG&E's books. Consequently, the gross amount of receivables from terminated accounts on the Company's books before bad debt reserves currently approximates $10 million. The Partnership has recently allocated substantial resources to a collection effort targeting these terminated accounts. Based on a sample group of accounts' preliminary collection results, the Partnership added $5.7 million to TG&E's bad debt provision for the year ended September 30, 2001. This brought the total bad debt reserve on terminated accounts to $6.0 million. Consequently, out of the roughly $15 million owed TG&E by terminated accounts, all but $4 million has been reserved. In addition, TG&E provided a $0.7 million bad debt provision against its active accounts receivable for the year ended September 30, 2001 bringing the total allowances to $0.9 million for active accounts at that time. In the course of 2001, TG&E has instituted entirely new credit policies including a detailed procedure to approve new accounts. Simultaneously, new information systems have been purchased and adopted to TG&E's needs. The new systems are currently being implemented at TG&E. As a result, TG&E believes its delinquency levels and bad debt experience will improve. Once the system enhancements are fully in place and all of TG&E's customers have gone through the new credit approval procedures, bad debt losses should approximate the experience of the Partnership's other two operating segments. TG&E incurred approximately $2.4 million of start up and organizational expenses involving compliance, legal and data processing costs, which were included in general and administrative expenses in 2001. TG&E Customer Acquisition Expense For fiscal 2001, TG&E customer acquisition expense decreased $0.2 million, or 10.3%, to $1.9 million, as compared to $2.1 million for fiscal 2000. This TG&E segment expense is for the cost of acquiring new accounts through the services of a third party direct marketing company. Unit Compensation Expense For fiscal 2001, unit compensation expense increased $2.7 million, or 410.8%, to $3.3 million, as compared to $0.6 million for fiscal 2000. These expenses were incurred under the Partnership's Unit Incentive Plan whereby certain employees and outside directors 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. The increase in fiscal 2001 resulted from the increased market price of the Subordinated Units, which was the basis for calculating unit compensation expense as well as for additional units that vested during fiscal 2001. Interest Expense, net For fiscal 2001, net interest expense increased $6.9 million, or 25.9%, to $33.7 million, as compared to $26.8 million for fiscal 2000. This increase was due to additional interest expense for higher working capital borrowings necessitated by the higher cost of product and additional interest expense for the financing of propane and heating oil acquisitions. Income Tax Expense For fiscal 2001, income tax expense increased $1.0 million, or 204.5%, to $1.5 million, as compared to $0.5 million for fiscal 2000. This increase was due to additional state income taxes for certain higher pretax earnings achieved for fiscal 2001. Cumulative Effect of Adoption of Accounting Principle For fiscal 2001, the Partnership recorded a $1.5 million increase in net income arising from the adoption of SFAS No. 133. 20
Net Income (loss) For fiscal 2001, net income decreased $6.6 million to a loss of $5.2 million, as compared to net income of $1.4 million for fiscal 2000. The decrease was due to a $9.6 million increase in net income at the propane segment offset by $3.6 million of less income at the heating oil segment, $8.2 million of additional net loss for TG&E and a $4.5 million additional net loss at the Partnership level, largely the result of the increase in unit compensation expense recorded at the Partnership level. The increase in net income for the propane segment was largely due to colder weather and as a result of acquisitions. The decrease in net income for the heating oil segment was largely due to the timing of when acquisitions were completed. 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) For the fiscal 2001, earnings before interest, taxes, depreciation and amortization, TG&E customer acquisition expense and unit compensation expense, less net gain (loss) on sales of assets (EBITDA) increased $18.8 million, or 28.4%, to $85.0 million as compared to $66.2 million, for fiscal 2000. This increase was due to a $14.9 million increase in the propane segment EBITDA, $11.3 million of additional EBITDA generated by the heating oil segment partially offset by $3.3 million of additional expenses at the Partnership level and by $4.1 million of lower TG&E EBITDA. The increase in the heating oil and propane segments was largely due to additional EBITDA provided by the impact of colder temperatures and acquisitions. EBITDA should not be considered as an alternative to net income (as an indicator of operating performance) or as an alternative to cash flow (as a measure of liquidity or ability to service debt obligations), but provides additional information for evaluating the Partnership's ability to make the Minimum Quarterly Distribution. The definition of "EBITDA" set forth above may be different from that used by other companies. FISCAL YEAR ENDED SEPTEMBER 30, 2000 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30, 1999 - ------------------------------------------------ Volume For fiscal 2000, retail volume of propane and heating oil increased 279.7 million gallons, or 161.2%, to 453.2 million gallons, as compared to 173.5 million gallons for fiscal 1999. This increase was due to 271.6 million gallons of additional volume provided by the heating oil segment and a 8.1 million gallon increase in the propane segment. While retail propane volume was favorably impacted by acquisitions and internal growth, a 2.5 million gallon reduction in agriculture sales and slightly 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 fiscal 2000 were 0.6% warmer than in the prior year's comparable period and 11.4% warmer than normal. Sales For fiscal 2000, sales increased $520.7 million, or 232.2%, to $744.7 million, as compared to $224.0 million for fiscal 1999. This increase was attributable to $454.5 million additional sales provided by the heating oil segment, $23.6 million of TG&E sales and a $42.6 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 $2.6 million due to an increased focus on the sales of rationally related products. Cost of Sales For fiscal 2000, cost of product increased $369.9 million, or 281.0%, to $501.6 million, as compared to $131.6 million for fiscal 1999. This increase was due to $247.0 million of additional costs attributable to the heating oil cost of product, $22.0 million of TG&E cost of product and for higher propane supply cost of $34.7 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 sales also increased due to the inclusion of $66.2 million of additional costs relating to the heating oil segment's cost of installation and service. 21
Delivery and Branch Expenses For fiscal 2000, delivery and branch expenses increased $70.4 million, or 81.4%, to $156.9 million, as compared to $86.5 million for fiscal 1999. This increase was due to $67.4 million of additional heating oil operating costs and $3.0 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 2%. Depreciation and Amortization For fiscal 2000, depreciation and amortization expenses increased $12.0 million, or 52.8%, to $34.7 million, as compared to $22.7 million for fiscal 1999. This increase was primarily due to $11.8 million of additional heating oil segment depreciation and amortization. General and Administrative Expenses For fiscal 2000, general and administrative expenses increased $8.1 million, or 69.5%, to $19.9 million, as compared to $11.7 million for fiscal 1999. This increase was due to the inclusion of an additional $4.3 million of general and administrative expenses for the heating oil segment, $2.0 million of TG&E general and administrative expenses, a $1.1 million increase in general and administrative expenses at the Partnership level and a $0.7 million increase for the propane segment. The increase in expenses at the Partnership level was primarily due to a full year inclusion of expenses for the office of the chief executive officer. The $0.7 million increase in general and administrative expenses at the propane segment was largely due to an increase in acquisition travel related expenditures as well as for normal inflationary increases. TG&E Customer Acquisition Expense For fiscal 2000, TG&E customer acquisition expense was $2.1 million. This TG&E segment expense is for the cost of acquiring new accounts through the services of a third party direct marketing company. Since its acquisition, TG&E added approximately 50,000 new customers. Unit Compensation Expense For fiscal 2000, unit compensation expense was $0.6 million. This expense was incurred under the Employee Unit Incentive Plans whereby certain employees and directors were granted senior subordinated units as incentive for increased efforts during employment and as an inducement to remain in the service of the Partnership. Interest Expense, net For fiscal 2000, net interest expense increased $11.3 million, or 73.5%, to $26.8 million, as compared to $15.4 million for fiscal 1999. This change was primarily due to $9.9 million of additional interest expense at the heating oil segment, $0.6 million of net interest expense for TG&E and additional interest expense for the financing of the propane acquisitions. Income Tax Expense (Benefit) For fiscal 2000, income tax expense increased $15.3 million to $0.5 million, as compared to an income tax benefit of $14.8 million for fiscal 1999. The change was primarily due to $12.0 million of deferred tax benefits for the heating oil segment and $2.9 million of deferred tax benefits at the propane segment level for fiscal 1999. These tax benefits resulted from the deferred tax assets generated by operating losses incurred in fiscal 1999 by the heating oil segment and by losses incurred by a certain propane company subsidiary. 22
Net Income (Loss) For fiscal 2000, net income increased $31.0 million, to $1.4 million, as compared to a net loss of $29.6 million for fiscal 1999. Additional net income provided by the heating oil segment was $35.4 million, TG&E incurred a $3.3 million net loss for the period, while a $1.2 million larger loss was incurred at the partnership level for the full year inclusion of cost as previously mentioned. The $0.2 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, offset by the reduction in deferred income tax benefit. 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 $72.0 million, to $66.2 million for fiscal 2000, as compared to a negative EBITDA of $5.8 million for the prior fiscal year. This increase was due to $69.6 million of additional EBITDA generated by the heating oil segment, a $3.9 million increase in the propane segment, a $1.1 million decrease in the EBITDA generated at the partnership level and $0.5 million of negative 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. EBITDA should not be considered as an alternative to net income (as an indicator of operating performance) or as an alternative to cash flow (as a measure of liquidity or ability to service debt obligations), but provides additional information for evaluating the Partnership's ability to make the Minimum Quarterly Distribution. The definition of "EBITDA" set forth above may be different from that used by other companies. Liquidity and Capital Resources During the year ended September 30, 2001, the Partnership sold 7.3 million common units, the net proceeds of which, was $123.8 million. These funds combined with net cash provided by operating activities of $63.1 million, $175.9 million of long-term debt borrowings ($143.0 million of senior secured notes issued by the heating oil segment, $29.5 million of senior notes issued by the propane segment and $3.4 million of acquisition related notes) and $0.6 million in proceeds from the sale of fixed assets amounted to $363.4 million. Such funds were used for acquisitions of $239.0 million, distributions of $50.6 million, debt repayment of $9.0 million and net working capital and acquisition facility repayment of $35.4 million, capital expenditures of $17.7 million and other financing activities of $5.4 million. As a result of the above activity, cash increased by $6.3 million to $17.2 million. The $143.0 million of senior secured notes mentioned above represent two separate issuances of notes by the heating oil segment. The first was a $40.0 million series of notes issued to three institutional lenders to refinance $40.0 million of indebtedness incurred under its bank acquisition facility. The senior notes bear interest at the rate of 8.96% per year and have an average life of five and three-quarter years with a final maturity date of November 1, 2010. The second was a $103.0 million series of notes issued to institutional lenders to complete a refinancing of $36.0 million of indebtedness incurred under its bank acquisition facility with the remaining proceeds of $67.0 million used to partially fund the Meenan acquisition. The Senior Notes bear interest at the rate of 8.25% and have an average life of seven years with a final maturity of August 1, 2013. The $29.5 million of senior notes mentioned above were issued to several institutional lenders by the propane segment to complete a refinancing of $25.0 million of indebtedness incurred under its bank acquisition facility. The balance of the proceeds, $4.5 million, were used to fund acquisition activity and to refinance maturities of senior notes. The senior notes bear interest at the rate of 7.89% per year and have an average life of nine years with a final maturity date of April 1, 2011. For fiscal 2002, the Partnership anticipates paying interest of approximately $43.0 million and anticipates growth and maintenance capital additions of approximately $15 million. 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 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 2002. 23
Accounting Principles Not Yet Adopted In July 2001, the FASB issued Statement No. 141, "Business Combinations" and Statement No. 142, "Goodwill and Other Intangible Assets". Statement No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as for all purchase method business combinations completed after June 30, 2001. Statement No. 141 also specifies criteria that intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. Statement No. 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually in accordance with the provisions of Statement No. 142. Statement No. 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". The Partnership adopted the provisions of Statement No. 141 effective July 1, 2001 and Statement No. 142 is required to be adopted effective October 1, 2002. Furthermore, any goodwill and any intangible asset determined to have an indefinite useful life that are acquired in a purchase business combination completed after June 30, 2001 will not be amortized, but will continue to be evaluated for impairment in accordance with the appropriate pre-Statement No. 142 accounting literature. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 will continue to be amortized prior to the adoption of Statement No. 142. Statement No. 141 will require upon adoption of Statement No. 142, that the Partnership evaluate its existing intangible assets and goodwill that were acquired in a prior purchase business combination, and to make any necessary reclassifications in order to conform with the new criteria in Statement No. 141 for recognition apart from goodwill. Upon adoption of Statement No. 142, the Partnership will be required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Partnership will be required to test the intangible asset for impairment in accordance with the provisions of Statement No. 142 within the first interim period. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of change in accounting principle in the first interim period. In connection with the transitional goodwill impairment evaluation, Statement No. 142 will require the Partnership to perform an assessment of whether there is an indication that goodwill is impaired as of the date of adoption. To accomplish this the Partnership must identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of the date of adoption. The Partnership will then have up to six months from the date of adoption to determine the fair value of each reporting unit and compare it to the reporting unit's carrying amount. To the extent a reporting unit's carrying amount exceeds its fair value, an indication exists that the reporting unit's goodwill may be impaired and the Partnership must perform the second step of the transitional impairment test. In the second step, the Partnership must compare the implied fair value of the reporting unit's goodwill, determined by allocating the reporting unit's fair value to all of its assets (recognized and unrecognized) and liabilities in a manner similar to a purchase price allocation in accordance with Statement No. 141, to its carrying amount, both of which would be measured as of the date of adoption. This second step is required to be completed as soon as possible, but no later than the end of the year of adoption. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in the Partnership's statement of operations. As of September 30, 2001, the Partnership had unamortized goodwill in the amount of $263.3 million. The Partnership also had $207.4 million of unamortized identifiable intangible assets, of which $201.2 will be subject to the transition provisions of SFAS No. 141 and No. 142. Amortization expense related to goodwill was $7.4 million and $7.9 million for the years ended September 30, 2000 and 2001, respectively. Because of the extensive effort needed to comply with adopting Statements No. 141 and No. 142, it is not practicable to reasonably estimate the impact of adopting these Statements on the Partnership's financial statements at the date of this report, including whether any transitional impairment losses will be required to be recognized as the cumulative effect of change in accounting principle. 24
ITEM 7A. 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 September 30, 2001, the Partnership had outstanding borrowings of approximately $31.9 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 $0.3 million annually. The Partnership also selectively uses derivative financial instruments to manage its exposure to market risk related to changes in the current and futures market price of home heating oil, propane and natural gas. 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, propane or natural gas 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 September 30, 2001, the potential impact on the Partnership's hedging activity would be to increase the fair market value of these outstanding derivatives by $5.0 million to a fair market value loss of $(1.0) million; and conversely a hypothetical ten percent decrease in the cost of product would decrease the fair market value of these outstanding derivatives by $4.0 million to a fair market value loss of $(10.0) million. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA SEE INDEX TO FINANCIAL STATEMENTS PAGE F-1 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE NONE 25
PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Partnership Management Star Gas LLC is the general partner of the Partnership. The membership interests in Star Gas LLC are owned by Audrey L. Sevin, Irik P. Sevin and Hanseatic Americas Inc. The General Partner manages and operates the activities of the Partnership. Unitholders do not directly or indirectly participate in the management or operation of the Partnership. The General Partner owes a fiduciary duty to the Unitholders. However, the Partnership agreement contains provisions that allow the General Partner to take into account the interest of parties other than the Limited Partners' in resolving conflict of interest, thereby limiting such fiduciary duty. Notwithstanding any limitation on obligations or duties, the General Partner will be liable, as the general partner of the Partnership, for all debts of the Partnership (to the extent not paid by the Partnership), except to the extent that indebtedness or other obligations incurred by the Partnership are made specifically non-recourse to the General Partner. William P. Nicoletti, Thomas J. Edelman and I. Joseph Massoud, who are neither officers nor employees of the General Partner nor directors, officers or employees of any affiliate of the General Partner, have been appointed to serve on the Audit Committee of the General Partner's Board of Directors. The Audit Committee has the authority to review, at the request of the General Partner, specific matters as to which the General Partner believes there may be a conflict of interest in order to determine if the resolution of such conflict proposed by the General Partner is fair and reasonable to the Partnership. Any matters approved by the Audit Committee will be conclusively deemed fair and reasonable to the Partnership, approved by all partners of the Partnership and not a breach by the General Partner of any duties it may owe the Partnership or the holders of Common Units. In addition, the Audit Committee reviews the external financial reporting of the Partnership, recommends engagement of the Partnership's independent accountants and reviews the Partnership's procedures for internal auditing and the adequacy of the Partnership's internal accounting controls. With respect to the additional matters, the Audit Committee may act on its own initiative to question the General Partner and, absent the delegation of specific authority by the entire Board of Directors, its recommendations will be advisory. As is commonly the case with publicly traded limited partnerships, the Partnership does not directly employ any of the persons responsible for managing or operating the Partnership. The management and workforce of Star Gas Propane and certain employees of Petro manage and operate the Partnership's business as officers of the General Partner and its Affiliates. See Item 1 - Business--Employees. 26
Directors and Executive Officers of the General Partner Directors are elected for one-year terms. The following table shows certain information for directors and executive officers of the general partner: <TABLE> <CAPTION> Name Age Position with the General Partner - ---- --- --------------------------------- <S> <C> <C> Irik P. Sevin/(b)/ ............................. 54 Chairman of the Board and Chief Executive Officer William G. Powers, Jr. ......................... 48 Executive Vice President - Heating Oil and Member of the Office of President Joseph P. Cavanaugh ............................ 64 Executive Vice President - Propane and Member of the Office of President Ami Trauber .................................... 62 Chief Financial Officer Carolyn LoGalbo ................................ 51 Executive Vice President Richard F. Ambury .............................. 44 Vice President and Treasurer James Bottiglieri .............................. 45 Vice President Audrey L. Sevin ................................ 75 Secretary Paul Biddelman/(a)//(b)/ ....................... 55 Director Thomas J. Edelman/(c)/ ......................... 50 Director I. Joseph Massoud/(c)/ ......................... 33 Director William P. Nicoletti/(c)/ ...................... 56 Director Stephen Russell/(a)/ ........................... 61 Director </TABLE> ____________________________________________ /(a)/ Member of the Compensation Committee /(b)/ Member of the Distribution Committee /(c)/ Member of the Audit Committee Irik P. Sevin has been the Chairman of the Board of Directors of Star Gas LLC since March 1999. From December 1993 to March 1999, Mr. Sevin served as Chairman of the Board of Directors of Star Gas Corporation, the predecessor general partner. Mr. Sevin has been a Director of Petro since its organization in October 1983, and Chairman of the Board of Petro since January 1993 and served as President of Petro from 1983 through January 1997. Mr. Sevin was an associate in the investment banking division of Kuhn Loeb & Co. and then Lehman Brothers Kuhn Loeb Incorporated from February 1975 to December 1978. William G. Powers, Jr. has been Executive Vice President of the heating oil division and member of the Office of the President of Star Gas LLC since March 1999. From December 1997 to March 1999 Mr. Powers served as President of Petro. Mr. Powers served as President and Chief Executive Officer of Star Gas Corporation, the predecessor general partner from December 1993 to November 1997. From 1984 to 1993 Mr. Powers was employed by Petro where he served in various capacities, including Regional Operations Manager and Vice President of Acquisitions. From 1977 to 1983, he was employed by The Augsbury Corporation, a company engaged in the wholesale and retail distribution of fuel oil and gasoline throughout New York and New England and served as Vice President of Marketing and Operations. Joseph P. Cavanaugh has been Executive Vice President of the propane division and member of the Office of the President of Star Gas LLC since March 1999. From December 1997 to March 1999 Mr. Cavanaugh served as President and Chief Executive Officer of Star Gas Corporation, the predecessor general partner. From October 1985 to December 1997, Mr. Cavanaugh held various financial and management positions with Petro. Prior to his current appointment Mr. Cavanaugh was also active in the Partnership's management with the development of safety/compliance programs, assisting with acquisitions and their subsequent integration into the Partnership. Ami Trauber has been Chief Financial Officer of Star Gas LLC since November 2001. From 1996 to 2001, Mr. Trauber was the Chief Financial Officer of Syratech Corporation, a consumer goods company. From 1991 to 1995, Mr. Trauber was the President, Chief Operating Officer and part owner of Ed's West, Inc., an apparel company. From 1978 to 1990, Mr. Trauber was Corporate Vice President - Finance and Controller of Harcourt General, Inc., a fortune 500 conglomerate. 27
Carolyn LoGalbo has been Executive Vice President of Star Gas LLC since November 2000. Ms. LoGalbo was Chief Marketing Officer at MetLife in the institutional business prior to joining Star Gas. Previously she was Chief Marketing Officer for MFS Communications, a start up telecommunications company and from 1980- 1993, she held various positions at Kraft Foods in general management and marketing. Richard F. Ambury has been Vice President and Treasurer of Star Gas LLC since March 1999. From February 1996 to March 1999, Mr. Ambury served as Vice President - Finance of Star Gas Corporation, the predecessor general partner. Mr. Ambury was employed by Petro from June 1983 through February 1996, where he served in various accounting/finance capacities. From 1979 to 1983, Mr. Ambury was employed by a predecessor firm of KPMG, a public accounting firm. Mr. Ambury has been a Certified Public Accountant since 1981. James J. Bottiglieri has been Vice President of Star Gas LLC since March 1999, and has served as Controller of Petro since 1994. Mr. Bottiglieri was Assistant Controller of Petro from 1985 to 1994 and was elected Vice President in December 1992. From 1978 to 1984, Mr. Bottiglieri was employed by a predecessor firm of KPMG, a public accounting firm. Mr. Bottiglieri has been a Certified Public Accountant since 1980. Audrey L. Sevin has been a Director of Star Gas LLC since March 1999 and was a Director of Star Gas Corporation, the predecessor general partner from December 1993 to March 1999. Mrs. Sevin served as the Secretary of Star Gas Corporation from June 1994 to March 1999. Mrs. Sevin had been a Director and Secretary of Petro since its organization in October 1983. Mrs. Sevin was a Director, executive officer and principal shareholder of A. W. Fuel Co., Inc. from 1952 until its purchase by Petro in May 1981. Paul Biddelman has been a Director of Star Gas LLC since March 1999 and was a Director of Star Gas Corporation, the predecessor general partner from December 1993 to March 1999. Mr. Biddelman had been a director of Petro since October 1994. Mr. Biddelman has been President of Hanseatic Corporation since December 1997. From April 1992 through December 1997, he was Treasurer of Hanseatic Corporation. Mr. Biddelman is a director of Celadon Group, Inc., Insituform Technologies, Inc., Six Flags, Inc. and System One Technologies, Inc. Thomas J. Edelman has been a Director of Star Gas LLC since March 1999 and was a Director of Star Gas Corporation, the predecessor general partner from December 1993 to March 1999. Mr. Edelman had been a Director of Petro since its organization in October 1983. Mr. Edelman has been Chairman of Patina Oil & Gas Corporation since its formation in May 1996. Mr. Edelman also serves as Chairman of Range Resources Corporation. He co-founded Snyder Oil Corporation and was its President and a Director from 1981 through February 1997. From 1975 to 1981, he was a Vice President of The First Boston Corporation. I. Joseph Massoud has been a Director of Star Gas LLC since October 1999. Since 1998 he has been President of The Compass Group International LLC, a private equity investment firm based in Westport, CT. From 1995 to 1998, Mr. Massoud was employed by Petro as a Vice President. From 1993 to 1995, Mr. Massoud was a Vice President of Colony Capital, Inc., a Los Angeles based private equity firm specializing in acquiring distressed real estate and corporate assets. Mr. Massoud is also a director of CBS Personnel and CPM Acquisition Corp. William P. Nicoletti has been a Director of Star Gas LLC since March 1999 and was a Director of Star Gas Corporation, the predecessor general partner from November 1995 to March 1999. Mr. Nicoletti is Managing Director of Nicoletti & Company Inc., a private investment banking firm servicing clients in the energy and transportation industries. In addition, Mr. Nicoletti serves as a Senior Advisor to the Energy Investment Banking Group of McDonald Investments Inc. From March 1998 until July 1999, Mr. Nicoletti was a Managing Director and co-head of Energy Investment Banking for McDonald Investments Inc. Prior to forming Nicoletti & Company Inc. in 1991, Mr. Nicoletti was a Managing Director and head of Energy Investment Banking for PaineWebber Incorporated. Previously, he held a similar position at E.F. Hutton & Company Inc. He is chairman of the board of directors of Russell-Stanley Holdings, Inc., a manufacturer and marketer of plastic and steel industrial containers and a director of StatesRail, Inc., a short-line railroad holding company. Stephen Russell has been a Director of Star Gas LLC since October 1999 and was a director of Petro from July 1996 to March 1999. He has been Chairman of the Board and Chief Executive Officer of Celadon Group Inc., an international transportation company, since its inception in July 1986. Mr. Russell has been a member of the Board of Advisors of the Johnson Graduate School of Management, Cornell University since 1983. 28
Audrey Sevin is the mother of Irik P. Sevin. There are no other familial relationships between any of the directors and executive officers. Meetings and Compensation of Directors During fiscal 2001, the Board of Directors met six times. All Directors attended each meeting except that Mr. Russell and Mr. Massoud did not attend one meeting and Mr. Nicoletti did not attend one other meeting. Star Gas LLC pays each director including the chairman, an annual fee of $27,000. Members of the audit committee receive an additional $5,000 per annum. Committees of the Board of Directors Star Gas LLC's Board of Directors has an Audit Committee, a Compensation Committee and a Distribution Committee. The members of each committee are appointed by the Board of Directors for a one-year term and until their respective successors are elected. Audit Committee The duties of the Audit Committee are described above under "Partnership Management". The current members of the Audit Committee are William P. Nicoletti, Thomas J. Edelman and I. Joseph Massoud. During fiscal 2001, the audit committee met six times. Members of the Audit Committee may not be employees of Star Gas LLC or its affiliated companies. Compensation Committee The current members of the Compensation Committee are Paul Biddelman and Stephen Russell. The duties of the Compensation Committee are (i) to determine the annual salary, bonus and other benefits, direct and indirect, of any and all named executive officers (as defined under Regulation S-K promulgated by the Securities and Exchange Commission) and (ii) to review and recommend to the full Board any and all matters related to benefit plans covering the foregoing officers and any other employees. During fiscal 2001, the Compensation Committee met five times. Distribution Committee The current members of the Distribution Committee are Irik Sevin and Paul Biddelman. The duties of the Distribution Committee are to discuss and review the Partnership's distributions. During fiscal 2001, the Distribution Committee met four times. Reimbursement of Expenses of the General Partner The General Partner does not receive any management fee or other compensation for its management of Star Gas Partners. The general partner is reimbursed at cost for all expenses incurred on the behalf of Star Gas Partners, including the cost of compensation, which is properly allocable to Star Gas Partners. The partnership agreement provides that the general partner shall determine the expenses that are allocable to Star Gas Partners in any reasonable manner determined by the general partner in its sole discretion. In addition, the general partner and its affiliates may provide services to Star Gas Partners for which a reasonable fee would be charged as determined by the general partner. 29
ITEM 11. EXECUTIVE COMPENSATION The following table sets forth the annual salary, bonuses and all other compensation awards and payouts to the President and Chief Executive Officer and to certain named executive officers of the General Partner for services rendered to Star Gas Partners and its subsidiaries during the fiscal years ended September 30, 2001, 2000 and 1999. <TABLE> <CAPTION> Summary Compensation Table Long-Term -------------------------- Annual Compensation Compensation ------------------------------------------------ ------------------------------- Other Restricted Securities Annual Stock Underlying Name and Principal Position Year Salary Bonus Compensation Awards UARs - --------------------------- ---- ------ ----- ------------ ---------- ---------- <S> <C> <C> <C> <C> <C> <C> Irik P. Sevin, 2001 $550,000 $1,137,200/(5)/ $ 7,966/(8)/ $495,000/(10)(11)/ Chairman of the Board and 2000 $500,000 $ 511,250/(6)/ $11,650/(8)/ $723,188/(9)/ 400,000/(12)/ Chief Executive Officer 1999 $325,000/(1)/ $ 225,000 $ 2,900/(8)/ William G. Powers, Jr., 2001 $325,000 $ 346,250/(5)/ $15,965/(8)/ Executive Vice President/(2)/ 2000 $250,000 $ 182,750/(6)/ $12,900/(8)/ 1999 $125,000/(3)/ $ 75,000 $ 3,900/(8)/ _/(11)/ Joseph P. Cavanaugh, 2001 $245,200 $ 300,150/(5)/ $18,768/(7)/ Executive Vice President 2000 $225,000 $ 89,250/(6)/ $18,768/(7)/ 1999 $225,000 $ 50,000 $18,768/(7)/ _/(11)/ George Leibowitz, 2001 $172,500 $ 246,200/(5)/ $ 8,950/(8)/ Chief Financial Officer/(4)/ 2000 $292,500/(5)/ $ 37,625/(6)/ $10,225/(8)/ 1999 $202,500/(5)/ $ 100,000 $ 2,150/(8)/ _/(11)/ Richard F. Ambury 2001 $183,950 $ 169,375/(5)/ $27,657/(7)/ Vice President and Treasurer 2000 $180,000 $ 83,375/(6)/ $27,657/(7)/ _/(11)/ 1999 $160,000 $ 70,000 $26,022/(7)/ </TABLE> /(1)/ Amount does not include $175,000 of compensation paid by Petro prior to its acquisition by the Partnership. /(2)/ Mr. Powers assumed the position of President of Petro on November 30, 1997. /(3)/ Amount does not include $125,000 of compensation paid by Petro prior to its acquisition by the Partnership. /(4)/ Mr. Trauber replaced Mr. Leibowitz who will be retiring on December 31, 2001, as the Chief Financial Officer effective November 1, 2001. /(5)/ Fiscal 2001 bonus amount includes the value of Senior Subordinated Units vested in fiscal 2001 under the Partnership's Employee Unit Incentive Plan as follows: Irik P. Sevin - $400,000, William G. Powers, Jr. - $160,000, Joseph P. Cavanaugh - $120,000, George Leibowitz - $226,200 and Richard F. Ambury - $100,000. Mr. Sevin was also granted 8,250 Common Units (vesting as of January 2002) in lieu of cash compensation for his 2001 bonus performance at a value of $165,000. /(6)/ Fiscal 2000 bonus amount includes the value of Senior Subordinated Units granted and vested in fiscal 2000 under the Partnership's Employee Unit Incentive Plan as follows; Irik P. Sevin - $117,500, William G. Powers, Jr. - $47,000, Joseph P. Cavanaugh - $35,250, George Leibowitz - $17,625 and Richard F. Ambury - $29,375. Mr. Sevin was also granted 20,149 Senior Subordinated Units in December 2000 in lieu of cash compensation for his 2000 bonus performance at a value of $168,750 on the grant date. /(7)/ These amounts represent funds paid in lieu of contributions to the Partnership's retirement plans. /(8)/ These amounts represent contributions under Petro's defined contribution retirement plan. /(9)/ This award represents the granting of 87,000 Restricted Senior Subordinated units that vest equally in four installments on December 1, 2001, December 1, 2002, December 1, 2003 and December 1, 2004. Distributions on the restricted units will accrue (to the extend declared) from June 30, 2000. /(10)/ This award represents the granting of 24,750 Restricted Common Units that vest equally in three installments on January 1, 2003, January 1, 2004 and January 1, 2005. Distributions on these units will accrue to the extent declared. /(11)/ As of September 30, 2001, the following Restricted grants of Senior Subordinated Units granted under the Partnership's Employee Unit Incentive Plan valued at the September 30, 2001 closing price were outstanding as follows: Irik P. Sevin - $1,335,000 (60,000 units), William G. Powers, Jr. - $534,000 (24,000 units), Joseph P. Cavanaugh - $400,500 (18,000 units), and Richard F. Ambury - $333,750 (15,000 units). /(12)/ Mr. Sevin was also granted an option to acquire shares in TG&E equal to approximately three percent of TG&E's outstanding shares as of March 21, 2001. Option/UAR Grants in Last Fiscal Year None 30
Aggregated Option/UAR Exercises in Last Fiscal Year and Fiscal Year End Option/UAR Values Number of Unexercised UARs at September 30, 2001 Value of In the Money UARs Name Exercisable(E)/Unexercisable(U) at September 30, 2001 ---- ------------------------------- --------------------- Irik P. Sevin 400,223 (U) $5,465,594 Long-Term Incentive Plans - Awards in Last Fiscal None Employment Contracts Agreement with Irik Sevin - ------------------------- The Partnership entered into an employment agreement (the "Employment Agreement") with Mr. Sevin effective October 1, 2001. Mr. Sevin's Employment Agreement has an initial term of five years, and automatically renews for successive one-year periods, unless earlier terminated by the Partnership or by Mr. Sevin or otherwise terminated in accordance with the Employment Agreement. The Employment Agreement for Mr. Sevin provides for an annual base salary of $600,000 which shall increase at the rate of $25,000 per year commencing in fiscal 2003. In addition, Mr. Sevin may earn a bonus of up to 80% of his annual base salary (the "Targeted Bonus") for services rendered based upon certain performance criteria. Mr. Sevin can also earn certain equity incentives if the Partnership meets certain performance criteria specified in the Employment Agreement. In addition, Mr. Sevin is entitled to certain supplemental executive retirement benefits ("SERP") if he retires after age 65. If a "change of control" (as defined in the Employment Agreement) of the Partnership occurs and prior thereto or at any time within two years subsequent to such change of control the Partnership terminates the Executive's employment without "cause" or the Executive resigns with "good reason" or the Executive terminates his employment during the thirty day period commencing on the first anniversary of a change of control, then Mr. Sevin will be entitled to (i) a lump sum payment equal to Mr. Sevin's anticipated annual basic salaries, Targeted Bonuses and equity incentives for the three year following the termination date; (ii) the continuation of Mr. Sevin's group insurance benefits for two years following the termination date; (iii) a cash payment equal to the value of 325,000 senior subordinated units; and (iv) the acceleration of Mr. Sevin's SERP benefits. The Employment Agreement provides that if any payment received by Mr. Sevin is subject to a federal excise tax under Section 4999 of the Internal Revenue Code, the payment will be grossed up to permit Mr. Sevin to retain a net amount on an after-tax basis equal to what he would have received had the excise tax not been payable. Agreement with George Leibowitz - -------------------------------- Petro entered into an employment agreement with Mr. Leibowitz, effective April 1, 1997 as modified, which provides (i) for an indefinite period, but ending not earlier than June 30, 2001 for 60% employment at an annual salary of $180,000. Upon termination of this agreement, there will be a final period of 6 months at an annual salary of $135,000 for 45% employment. In addition, if terminated by the Partnership, all remaining senior subordinated unit grants will vest and (ii) payments of $18,750 per month for April 1997 to March 2000 were made. This contract was terminated by mutual agreement effective July 1, 2001. 401(k) Plans The Star Gas Employee Savings Plan is a voluntary defined contribution plan covering non-union and union employees who have attained the age of 21 and who have completed one year of service. Participants in the plan may elect to contribute a sum not to exceed 15% of a participant's compensation. For non-union employees, Star Gas Propane contributes a matching amount equaling the participant's contribution not to exceed 3% of the participant's compensation. In addition, the plan allows Star Gas Propane to contribute an additional discretionary amount, which will be allocated to each participant based on such participant's compensation as a percentage of total compensation of all participants. Messrs. Sevin, Powers and Leibowitz are covered under a 401(K) defined contribution plan maintained by Petro. Participants in the plan may elect to contribute a sum not to exceed 17% of a participant's compensation or $10,500. Under this plan, Petro makes a 4% core contribution of a participant's compensation up to $170,000 and matches 2/3 of each amount that a participant contributes with a maximum employer match of 2%. 31
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table shows the beneficial ownership as of November 15, 2001 of common units, senior subordinated units, junior subordinated units and general partner units by: (1) Star Gas LLC and certain beneficial owners and all of the directors and officers of Star Gas LLC; (2) each of the named executive officers of Star Gas LLC; and (3) all directors and executive officers of Star Gas LLC as a group. The address of each person is c/o Star Gas Partners, L.P. at 2187 Atlantic Street, Stamford, Connecticut 06902-0011. An asterisk in the percentage column refers to a percentage less than one percent. <TABLE> <CAPTION> Senior Junior ------ ------ Common Units Subordinated Units Subordinated Units General Partner Units/(a)/ ------------ ------------------ ------------------ -------------------------- Name Number Percentage Number Percentage Number Percentage Number Percentage - ------------------ ------ ---------- ------ ---------- ------ ---------- ------ ---------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Star Gas LLC - - % 29,133 - % - - % 325,729 100% Irik P. Sevin - - 55,699(b) 1.8 53,426 15.5 325,729(b) 100 Audrey L. Sevin - - 29,133(b) - 153,131 44.3 325,729(b) 100 Hanseatic Americas, Inc. 350,000 1.5% 29,133(b) - 138,807 40.2 325,729(b) 100 Paul Biddelman - - 2,157 * - - - - Thomas Edelman - - 97,801(c)(d) 3.2 - - - - I. Joseph Massoud 519 * 1,852 * - - - - William P. Nicoletti - - 1,852 * - - - - Stephen Russell - - 1,852 * - - - - Richard F. Ambury 2,125 * 5,489 * - - - - Ami Trauber - - - - - - - - Carolyn LoGalbo - - 2,724 * - - - - James Bottiglieri 1,500 * 1,634 * - - - - Joseph P. Cavanaugh 1,000 * 6,600 * - - - - William G. Powers, Jr. 1,000 * 8,715 * - - - - All officers and directors and Star Gas LLC as a group (13 persons) 6,144 * 186,375 6.2 206,557 59.8% 325,729 100% </TABLE> (a) For purpose of this table, the number of General Partner Units is deemed to include the 0.01% General Partner interest in Star Gas Propane. (b) Assumes each of Star Gas LLC owners may be deemed to beneficially own all of Star Gas LLC's general partner units and senior subordinated units, however, they disclaim beneficial ownership of these units. (c) Includes senior subordinated units owned by Mr. Edelman's wife and trust for the benefit of his minor children. (d) Includes 6,000 senior subordinated units owned by trusts for the benefit of Mr. Edelman's siblings for which Mr. Edelman serves as Trustee. Mr. Edelman disclaims beneficial ownership of these units. * Amount represents less than 1%. Section 16(a) of the Securities Exchange Act of 1934 requires the General Partner's officers and directors, and persons who own more than 10% of a registered class of the Partnership's equity securities, to file reports of beneficial ownership and changes in beneficial ownership with the Securities and Exchange Commission ("SEC"). Officers, directors and greater than 10 percent unitholders are required by SEC regulation to furnish the General Partner with copies of all Section 16(a) forms. Based solely on its review of the copies of such forms received by the General Partner, or written representations from certain reporting persons that no Form 5's were required for those persons, the General Partner believes that during fiscal year 2001 all filing requirements applicable to its officers, directors, and greater than 10 percent beneficial owners were met in a timely manner. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Partnership and the General Partner have certain ongoing relationships with Petro and its affiliates. Affiliates of the General Partner, including Petro, perform certain administrative services for the General Partner on behalf of the Partnership. Such affiliates do not receive a fee for such services, but are reimbursed for all direct and indirect expenses incurred in connection therewith. The Partnership has agreed to pay Mr. Edelman a finder's fee of 1% of the purchase price if the Partnership acquires a company that Mr. Edelman has introduced to the Partnership. The Partnership is under no obligation to pursue this acquisition and the terms of such acquisition have not yet been determined. 32
PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Financial Statements See "Index to Consolidated Financial Statements and Financial Statement Schedule" set forth on page F-1. 2. Financial Statement Schedule. See "Index to Consolidated Financial Statements and Financial Statement Schedule" set forth on page F-1. 3. Exhibits. See "Index to Exhibits" set forth on page 34. (b) Reports on Form 8-K. The Partnership did not file a Form 8-K during the quarter ended September 30, 2001. 33
INDEX TO EXHIBITS Exhibit Number Description - ------- ----------- 4.2 Form of Agreement of Limited Partnership of Star Gas Partners, L.P.(2) 4.3 Form of Agreement of Limited Partnership of Star Gas Propane, L.P.(2) 4.4 Amendment No. 1 dated as of April 17, 2001 to Amended and Restated Agreement of Limited Partnership of Star Gas Partners, L.P. (18) 4.5 Unit Purchase Rights Agreement dated April 17, 2001(19) 10.1 Form of Credit Agreement among Star Gas Propane, L.P. and certain banks(3) 10.2 Form of Conveyance and Contribution Agreement among Star Gas Corporation, the Partnership and the Operating Partnership.(3) 10.3 Form of First Mortgage Note Agreement among certain insurance companies, Star Gas Corporation and Star Gas Propane L.P.(3) 10.4 Intercompany Debt(3) 10.5 Form of Non-competition Agreement between Petro and the Partnership(3) 10.6 Form of Star Gas Corporation 1995 Unit Option Plan(3)(17) 10.7 Amoco Supply Contract(3) 10.8 Stock Purchase Agreement dated October 20, 1997 with respect to the Pearl Gas Acquisition(4) 10.9 Conveyance and Contribution Agreement with respect to the Pearl Gas Acquisition(4) 10.10 Second Amendment dated as of October 21, 1997 to the Credit Agreement dated as of December 13, 1995 among the Operating Partnership, Bank Boston, N.A. and NationsBank, N.A.(4) 10.11 Note Agreement, dated as of January 22, 1998, by and between Star Gas and The Northwestern Mutual Life Insurance Company(6) 10.12 Third Amendment dated April 15, 1998 to the Bank Credit Agreement (8) 10.13 Fourth Amendment dated November 3, 1998 to the Bank Credit Agreement (9) 10.14 Agreement and Plan of Merger by and among Petroleum Heat and Power Co., Inc., Star Gas Partners, L.P., Petro/Mergeco, Inc., and Star Gas Propane, L.P. (2) 10.15 Exchange Agreement (2) 10.16 Amendment to the Exchange Agreement dated as of February 10, 1999 (2) 10.17 Seventh amendment dated June 18, 1999 to the Credit Agreement dated December 13, 1995, between Star Gas Propane, L.P. and BankBoston, N.A. and NationsBank, N.A.(10) 10.18 Amendment No. 2 dated as of February 15, 2000, to the Credit Agreement, dated as of March 15. 10.19 $12,500,000 8.67% First Mortgage Notes, Series A, due March 30, 2012 $15,000,000 8.72% First Mortgage Notes, Series B, due March 30, 2015 dated as of March 30, 2000 (12) 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.(13) 10.21 June 2000 Star Gas Employee Unit Incentive Plan (13)(17) 10.22 $40,000,000 Senior Secured Note Agreement (14) 10.23 Note Purchase Agreement for $7,500,000 - 7.62% First Mortgage Notes, Series A, due April 1, 2008 and $22,000,000 - 7.95% First Mortgage Notes, Series B, due April 1, 2011. (15) 10.24 Credit Agreement, dated as of March 30, 2001, by Total Gas & Electric, Inc. and Chase Manhattan Bank, as agent. (15) 10.25 Credit Agreement dated as of June 15, 2001 by Petroleum Heat and Power Co., Inc., and Bank of America N.A. as agent. (16) 10.26 Credit Agreement dated as of July 30, 2001 by Star Gas Partners, L.P., Petro Holdings, Inc., Petroleum Heat and Power Co., Inc., and the agents Bank of America, N.A. and First Union Securities, Inc.(1) 10.27 Employment agreement dated as of September 30, 2001 between Star Gas LLC, and Irik P. Sevin.(1)(17) 10.28 Equity Purchase Agreement dated July 31, 2001(20) 21 Subsidiaries of the Registrant (6) 23.1 Consent of KPMG LLP (1) (1) Filed herewith. (2) Incorporated by reference to an Exhibit to the Registrant's Registration Statement on Form S-4, File No. 333-66005, filed with the Commission on October 22, 1998. (3) Incorporated by reference to the same Exhibit to Registrant's Registration Statement on Form S-1, File No. 33-98490, filed with the Commission on December 13, 1995. (4) Incorporated by reference to the same Exhibit to Registrant's Periodic Report on Form 8-K, as amended, as filed with the Commission on October 23 and 29, 1997. (5) Incorporated by reference to the same Exhibit to Registrant's Registration Statement on Form S-1, File No. 333-40855, filed with the Commission on December 11, 1997. (6) Incorporated by reference to the same Exhibit to Registrant's Registration Statement on Form S-3, File No. 333-47295, filed with the Commission on March 4, 1998. (7) Incorporated by reference to the same Exhibit to Registrant's Statement on Form S-4, File No. 333-49751, filed with the Commission on April 9, 1998. (8) Incorporated by reference to the same Exhibit to Registrant's Quarterly Report on Form 10-Q filed with the Commission on May 7, 1998. (9) Incorporated by reference to the same Exhibit to Registrant's Annual Report on Form 10-K filed with the Commission on November 24, 1998. (10) Incorporated by reference to the same Exhibit to Registrant's Quarterly Report on Form 10-Q filed with the Commission on August 11, 1999. (11) [Intentionally Omitted] (12) Incorporated by reference to the same Exhibit to Registrant's Quarterly Report on Form 10-Q filed with the Commission on April 26, 2000. (13) Incorporated by reference to the same Exhibit to Registrant's Quarterly Report on Form 10-Q filed with the Commission on August 10, 2000. (14) In Accordance with item 601(B)(4)(iii) of Regulation S-K, the Partnership will provide a copy of this document to the SEC upon request. (15) Incorporated by reference to the same Exhibit to Registrant's Quarterly Report on Form 10-Q filed with the Commission on May 10, 2001 (16) Incorporated by reference to the same Exhibit to Registrant's Quarterly Report on Form 10-Q filed with the Commission on August 13, 2001 (17) Management compensation agreement (18) Incorporated by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K dated April 16, 2001. (19) Incorporated by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form 8-A filed with the Commission on April 18, 2001. (20) Incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated July 31, 2001. 34
SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the General Partner has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized: Star Gas Partners, L.P. By: Star Gas LLC (General Partner) /s/Irik P. Sevin --------------------------------------- By: Irik P. Sevin Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the date indicated: <TABLE> <CAPTION> Signature Title Date - --------- ----- ---- <S> <C> <C> /s/ Irik P. Sevin Chairman of the Board, Chief Executive December 20, 2001 - ----------------------------------------------- Officer and Director Irik P. Sevin Star Gas LLC /s/ Ami Trauber Chief Financial Officer December 20, 2001 - ----------------------------------------------- Star Gas LLC Ami Trauber (Principal Financial and Accounting Officer) /s/ Audrey L. Sevin Director December 20, 2001 - ----------------------------------------------- Star Gas LLC Audrey L. Sevin /s/ Paul Biddelman Director December 20, 2001 - ----------------------------------------------- Star Gas LLC Paul Biddelman /s/ Thomas J. Edelman Director December 20, 2001 - ----------------------------------------------- Star Gas LLC Thomas J. Edelman /s/ I. Joseph Massoud Director December 20, 2001 - ----------------------------------------------- Star Gas LLC I. Joseph Massoud /s/ William P. Nicoletti Director December 20, 2001 - ----------------------------------------------- Star Gas LLC William P. Nicoletti /s/ Stephen Russell Director December 20, 2001 - ----------------------------------------------- Star Gas LLC Stephen Russell </TABLE> 35
STAR GAS PARTNERS, L.P. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE <TABLE> <CAPTION> PAGE ---- <S> <C> Part II Financial Information: Item 8 - Financial Statements Independent Auditors' Report ...................................... F-2 Consolidated Balance Sheets as of September 30, 2000 and 2001 ..... F-3 Consolidated Statements of Operations for the years ended September 30, 1999, 2000 and 2001 ................................. F-4 Consolidated Statements of Comprehensive Income for the years ended September 30, 1999, 2000 and 2001 ..................... F-5 Consolidated Statement of Partners' Capital for the years ended September 30, 1999, 2000 and 2001 ................................. F-6 Consolidated Statements of Cash Flows for the years ended September 30, 1999, 2000 and 2001 ................................. F-7 Notes to Consolidated Financial Statements ........................ F-8 - F-30 Schedule for the years ended September 30, 1999, 2000 and 2001 II. Valuation and Qualifying Accounts ...................... F-31 </TABLE> All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or the notes therein. F-1
STAR GAS PARTNERS, L.P. AND SUBSIDIARIES INDEPENDENT AUDITORS' REPORT The Partners of Star Gas Partners, L.P.: We have audited the consolidated financial statements of Star Gas Partners, L.P. and Subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above, present fairly, in all material respects, the financial position of Star Gas Partners, L.P. and Subsidiaries as of September 30, 2000 and 2001 and the results of their operations and their cash flows for each of the years in the three-year period ended September 30, 2001, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Stamford, Connecticut KPMG LLP December 20, 2001 F-2
STAR GAS PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> September 30, ---------------------------------- (in thousands) 2000 2001 ------------- ------------- <S> <C> <C> Assets Current assets: Cash and cash equivalents $ 10,910 $ 17,228 Receivables, net of allowance of $1,956 and $11,364, respectively 66,858 104,973 Inventories 34,407 41,130 Prepaid expenses and other current assets 14,815 21,931 ------------- ------------- Total current assets 126,990 185,262 ------------- ------------- Property and equipment, net 171,300 235,371 Long-term portion of accounts receivable 7,282 6,752 Intangibles and other assets, net 313,404 471,434 ------------- ------------- Total assets $ 618,976 $ 898,819 ============= ============= Liabilities and Partners' Capital Current liabilities: Accounts payable $ 27,874 $ 35,800 Working capital facility borrowings 24,400 13,866 Current maturities of long-term debt 16,515 11,886 Accrued expenses 42,410 77,678 Unearned service contract revenue 15,654 24,575 Customer credit balances 37,943 65,207 ------------- ------------- Total current liabilities 164,796 229,012 ------------- ------------- Long-term debt 310,414 457,086 Other long-term liabilities 4,588 14,457 Partners' Capital: Common unitholders 134,672 209,911 Subordinated unitholders 6,090 2,772 General partner (1,584) (2,220) Accumulated other comprehensive income - (12,199) ------------- ------------- Total Partners' Capital 139,178 198,264 ------------- ------------- Total Liabilities and Partners' Capital $ 618,976 $ 898,819 ============= ============= </TABLE> See accompanying notes to consolidated financial statements. F-3
STAR GAS PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS <TABLE> <CAPTION> Years Ended September 30, -------------------------------------------------------- (in thousands, except per unit data) 1999 2000 2001 ------------- ------------- ------------- <S> <C> <C> <C> Sales $ 224,020 $ 744,664 $ 1,085,973 Costs and expenses: Cost of sales 131,649 501,589 771,317 Delivery and branch expenses 86,489 156,862 200,059 Depreciation and amortization 22,713 34,708 44,396 General and administrative expenses 11,717 19,862 35,771 TG&E customer acquisition expense - 2,082 1,868 Unit compensation expense - 649 3,315 ------------- ------------- ------------- Operating income (loss) (28,548) 28,912 29,247 Interest expense, net 15,435 26,784 33,727 Amortization of debt issuance costs 347 534 737 ------------- ------------- ------------- Income (loss) before income taxes, minority interest and cumulative effect of change in accounting principle (44,330) 1,594 (5,217) Minority interest in net loss of TG&E - 251 - Income tax expense (benefit) (14,780) 492 1,498 ------------- ------------- ------------- Income (loss) before cumulative change in accounting principle (29,550) 1,353 (6,715) Cumulative effect of change in accounting principle for adoption of SFAS No. 133, net of income taxes - - 1,466 ------------- ------------- ------------- Net income (loss) $ (29,550) $ 1,353 $ (5,249) ============= ============= ============= General Partner's interest in net income (loss) $ (587) $ 24 $ (75) ------------- ------------- ------------- Limited Partners' interest in net income (loss) $ (28,963) $ 1,329 $ (5,174) ============= ============= ============= Basic and diluted net income (loss) per Limited Partner unit $ (2.53) $ 07 $ (.23) ============= ============= ============= Basic and diluted weighted average number of Limited Partner units outstanding 11,447 18,288 22,439 ============= ============= ============= </TABLE> See accompanying notes to consolidated financial statements. F-4
STAR GAS PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME <TABLE> <CAPTION> Years Ended September 30, -------------------------------------------- (in thousands) 1999 2000 2001 ---- ---- ---- <S> <C> <C> <C> Net income (loss) $ (29,550) $ 1,353 $ (5,249) Other comprehensive income (loss) Unrealized loss on derivative instruments - - (16,121) Unrealized loss on pension plan obligations - - (4,149) --------- --------- -------- Comprehensive income (loss) $ (29,550) $ 1,353 $(25,519) ========= ========= ======== Reconciliation of Accumulated Other Comprehensive Income Balance, beginning of period $ - $ - $ - Cumulative effect of the adoption of SFAS No. 133 - - 10,544 Current period reclassification to earnings - - (2,473) Current period other comprehensive loss - - (20,270) --------- --------- -------- Balance, end of period $ - $ - $(12,199) ========= ========= ======== </TABLE> See accompanying notes to condensed consolidated financial statements. F-5
STAR GAS PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL Years Ended September 30, 1999, 2000 and 2001 (in thousands, except per unit amounts) <TABLE> <CAPTION> Number of Units ------------------------------------------- Senior Junior General Senior Junior General Common Sub. Sub. Sub. Partner Common Sub. Sub. Sub. Partner ------ ---- ---- ---- ------- ------ ---- ---- ---- ------- --------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Balance as of September 30, 1998 3,859 2,396 - - - $ 58,686 $ (1,446) $ - $ - $ 107 Exchange of ownership in connection with the Star Gas / Petro Transaction (2,396) 2,477 345 326 (8,958) (2,754) 11,903 797 (988) Issuance of Units in equity offerings 10,076 135,816 Issuance of Units in redemption of Petro's 12 7/8% Preferred Stock 401 5,399 Issuance of Units in redemption of Petro's Junior Preferred Stock 103 1,459 Net loss (26,141) 4,200 (6,165) (857) (587) Distributions ($2.25 per common unit) (19,484) (140) Other (61) (871) 200 --------------------------------------------------------------------------------------------- Balance as of September 30, 1999 14,378 - 2,477 345 326 145,906 - 5,938 (60) (1,608) Issuance of Common Units 1,667 22,611 Issuance of Senior Subordinated Units 110 649 Net income 1,122 182 25 24 Distributions: ($2.30 per common unit) (34,967) ($0.25 per senior Sub. (644) unit) --------------------------------------------------------------------------------------------- Balance as of September 30, 2000 16,045 - 2,587 345 326 134,672 - 6,125 (35) (1,584) Issuance of Common Units 7,349 123,846 Issuance of Senior Subordinated Units 130 3,319 Net loss (4,475) (620) (79) (75) Other Comprehensive loss, net Distributions: ($2.300 per common unit) (44,132) ($1.975 per senior sub. (5,341) unit) ($1.725 per junior sub. (597) unit) ($1.725 per general partner unit) (561) --------------------------------------------------------------------------------------------- Balance as of September 30, 2001 23,394 - 2,717 345 326 $ 209,911 $ - $ 3,483 $ (711) $(2,220) ============================================================================================= <CAPTION> Other Compre- Total hensive Partners' Income Capital ------ ------- --------------------- <S> <C> <C> Balance as of September 30, 1998 $ - $ 57,347 Exchange of ownership in connection with the Sta Gas / Petro Transaction - Issuance of Units in equity offerings 135,816 Issuance of Units in redemption of Petro's 12 7/8% Preferred Stock 5,399 Issuance of Units in redemption of Petro's Junior Preferred Stock 1,459 Net loss (29,550) Distributions ($2.25 per common unit) (19,624) Other (671) --------------------- Balance as of September 30, 1999 - 150,176 Issuance of Common Units 22,611 Issuance of Senior Subordinated Units 649 Net income 1,353 Distributions: ($2.30 per common unit) (34,967) ($0.25 per senior Sub. (644) unit) --------------------- Balance as of September 30, 2000 - 139,178 Issuance of Common Units 123,846 Issuance of Senior Subordinated Units 3,319 Net loss (5,249) Other Comprehensive loss, net (12,199) (12,199) Distributions: ($2.300 per common unit) (44,132) ($1.975 per senior sub. (5,341) unit) ($1.725 per junior sub. (597) unit) ($1.725 per general partner unit) (561) --------------------- Balance as of September 30, 2001 $(12,199) $ 198,264 ===================== </TABLE> See accompanying notes to consolidated financial statements. F-6
STAR GAS PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> (in thousands) Years Ended September 30, ----------------------------------------- 1999 2000 2001 --------- --------- --------- <S> <C> <C> <C> Cash flows provided by (used in) operating activities: Net income (loss) $ (29,550) $ 1,353 $ (5,249) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 22,713 34,708 44,396 Amortization of debt issuance cost 347 534 737 Minority interest in net loss of TG&E - (251) - Unit compensation expense - 649 3,315 Provision for losses on accounts receivable 371 2,669 10,624 (Gains) loss on sales of fixed assets 83 (143) 26 Deferred tax benefit (14,946) - - Cumulative effect of change in accounting principle for the adoption of SFAS No. 133 - - (1,466) Changes in operating assets and liabilities: Decrease (increase) in receivables 27,954 (22,327) (44,905) Increase in inventories (1,962) (6,272) (3,824) Increase in other assets (8,460) (3,134) (15,066) Increase (decrease) in accounts payable (1,922) 6,589 10,942 Increase in other current and long-term liabilities 16,167 5,989 63,614 --------- --------- --------- Net cash provided by operating activities 10,795 20,364 63,144 --------- --------- --------- Cash flows provided by (used in) investing activities: Capital expenditures (7,383) (7,560) (17,687) Proceeds from sales of fixed assets 207 1,136 596 Cash acquired in acquisitions 19,151 876 5 Acquisitions (14,952) (59,624) (239,048) --------- --------- --------- Net cash used in investing activities (2,977) (65,172) (256,134) --------- --------- --------- Cash flows provided by (used in) financing activities: Working capital facility borrowings 20,350 104,450 114,250 Working capital facility repayments (21,970) (85,801) (124,784) Acquisition facility borrowings 21,000 65,800 70,700 Acquisition facility repayments (16,700) (36,200) (95,600) Repayment of debt, net (198,062) (9,426) (8,980) Proceeds from issuance of debt 87,552 28,726 175,923 Distributions (19,624) (35,611) (50,631) Increase in deferred charges (944) (442) (5,527) Proceeds from issuance of Common Units, net 136,065 22,611 123,846 Redemption of preferred stock (11,746) - - Other (362) (2,881) 111 --------- --------- --------- Net cash provided by (used in) financing activities (4,441) 51,226 199,308 --------- --------- --------- Net increase in cash 3,377 6,418 6,318 Cash at beginning of period 1,115 4,492 10,910 --------- --------- --------- Cash at end of period $ 4,492 $ 10,910 $ 17,228 ========= ========= ========= </TABLE> See accompanying notes to consolidated financial statements. F-7
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 diversified home energy distributor and services provider, specializing in heating oil, propane, natural gas and electricity. Star Gas Partners is a Master Limited Partnership, which at September 30, 2001 had 23.4 million common limited partner units (trading symbol "SGU" representing a 87.4% limited partner interest in Star Gas Partners) and 2.7 million senior subordinated units (trading symbol "SGH" representing a 10.1% limited partner interest in Star Gas Partners), which are traded on the New York Stock Exchange. Additional interest in Star Gas Partners are comprised of 0.3 million junior subordinated units (representing a 1.3% limited partner interest in Star Gas Partners) and 0.3 million general partner units (representing a 1.2% general partner interest in Star Gas Partners). The Partnership acquired Petro on March 26, 1999 in a series of transactions, which closed concurrently (see footnote 7). This acquisition was accounted for under the purchase method of accounting. Petro, Star Gas Partners and Star Gas Propane entered into a merger agreement. Under the terms of this agreement, a newly formed subsidiary of Star Gas Propane was merged with Petro, with Petro surviving the merger as a wholly-owned indirect subsidiary of Star Gas Propane. Operationally the Partnership is organized as follows: . Star Gas Propane, L.P., ("Star Gas Propane" or the "propane segment") is a wholly owned subsidiary of Star Gas. Star Gas Propane markets and distributes propane gas and related products to more than 280,000 customers in the Midwest, Northeast, Florida and Georgia. . Petro Holdings, Inc. ("Petro" or the "heating oil segment"), is the nation's largest distributor of home heating oil and serves approximately 530,000 customers in the Northeast and Mid-Atlantic. Petro is an indirect wholly owned subsidiary of Star Gas Propane, L.P. . 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 households in deregulated energy markets in the states of New York, New Jersey, Florida, Maryland and the District of Columbia and serves approximately 50,000 residential customers. TG&E is an 80% owned subsidiary of the Partnership. . Star Gas Partners ("Partners" or the "Public Master Limited Partnership") includes the office of the Chief Executive Officer and in addition has the responsibility for maintaining investor relations and investor reporting for 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 80% of TG&E's balance sheet. Revenue and expenses are also consolidated with the Partnership with a deduction for the net loss allocable to the minority interest, which amount has been limited based upon the equity of the minority interest. All material intercompany items and transactions have been eliminated in consolidation. Reclassification Certain prior year amounts have been reclassified to conform with the current year presentation. Use of Estimates The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America 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, natural gas, electricity, propane/heating oil and air conditioning 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. F-8
2) Summary of Significant Accounting Policies - (continued) Basic and Diluted Net Income (Loss) per Limited Partner Unit Net income (loss) per Limited Partner Unit is computed by dividing net income (loss), after deducting the General Partner's interest, by the weighted average number of Common Units, Senior Subordinated Units and Junior Subordinated Units outstanding. Cash Equivalents The Partnership considers all highly liquid investments with a maturity of three months or less, when purchased, to be cash equivalents. 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 for goodwill acquired prior to July 1, 2001. In accordance with SFAS No. 142, goodwill acquired after June 30, 2001 is not amortized. 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 accelerated method over six 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. 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. F-9
2) Summary of Significant Accounting Policies - (continued) TG&E Customer Acquisition Expense TG&E customer acquisition expense represents the purchase of new accounts from a third party direct marketing company for the Partnership's natural gas and electric reseller division. Such costs are charged as incurred upon acquisition of new customers. Employee Unit Incentive Plan When applicable, the Partnership accounts for stock-based compensation arrangements in accordance with APB No. 25. Compensation costs for fixed awards on pro-rata vesting are recognized straight-line over the vesting period. 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 if the Partnership achieves annual targeted distributable cash flow. The Partnership records an expense for the incentive units granted, which require no cash contribution, 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. 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. Concentration of Revenue with Price Plan Customers Approximately 45% of the volume sold in the Partnership's heating oil segment is sold to individual customers under an agreement pre-establishing a fixed or maximum sales price of home heating oil over a twelve month period. The fixed or maximum price at which home heating oil is sold to these price plan customers is generally renegotiated prior to the heating season of each year based on current market conditions. The heating oil segment currently enters into derivative instruments (futures, options, collars and swaps) for a substantial majority of the heating oil it sells to these price plan customers in advance and at a fixed cost. Should events occur after a price plan customer's price is established that increases the cost of home heating oil above the amount anticipated, margins for the price plan 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 price plan 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. Derivatives and Hedging Prior to October 2000 and in accordance with Statement of Financial Accounting Standards ("SFAS") No. 80. "Accounting for Futures Contracts," futures contracts were classified as a hedge when the item to be hedged exposed the Partnership to price risk and the futures contract reduced that risk exposure. Future contracts that related to transactions that were expected to occur were accounted for as a hedge when the significant characteristics and expected terms of the anticipated transactions were identified and it was probable that the anticipated transaction would occur. If a transaction did not meet the criteria to qualify as a hedge, it was considered to be speculative. Any gains or losses associated with F-10
2) Summary of Significant Accounting Policies - (continued) futures contracts which were classified as speculative were recognized in the current period. If a futures contract that had been accounted for as a hedge was closed or matured before the date of the anticipated transaction, the accumulated change in value of the contract was carried forward and included in the measurement of the related transaction. Option contracts were accounted for in the same manner as futures contracts. To hedge a substantial portion of the purchase price associated with heating oil gallons being sold to its price plan customers, the heating oil segment at September 30, 2000 had outstanding 88 million gallons of futures contracts to buy heating oil with a notional value of $71 million and a fair market value of $79.4 million; 62.6 million gallons of futures contracts to sell heating oil with a notional value of $49.7 million and a fair market value of $55.7 million; 101 million gallons of option contracts to buy heating oil with a notional value of $57.9 million and a fair market value of $68.3 million and 108 million gallons of option contracts to sell heating oil. None of the heating oil segment's outstanding options to sell heating oil, which allow the Partnership the right to sell heating oil at a fixed price, were in the money at September 30, 2000. The contracts expired at various times with no contract expiring later than June 2001. To hedge a substantial portion of the purchase price associated with propane gallons anticipated to be sold to its fixed price customers, the propane segment at September 30, 2000 had outstanding futures contracts to buy 7.6 million gallons of propane with a notional value of $3.2 million and a fair market value totaling $3.0 million. The contracts expired at various times with no contracts expiring later than March 2001. To hedge a substantial portion of its natural gas inventories, the TG&E segment at September 30, 2000, had outstanding futures contracts to sell 670,000 dekatherms of natural gas with a notional value of $2.8 million and fair market value of $3.4 million. At September 30, 2000, the unrealized gain (losses) on the heating oil segment's, propane segment's and TG&E's hedging activity was approximately $12.7 million, $(0.2) million and $(0.6) million, respectively. The heating oil segment's hedging activity was designed to help it achieve its planned margins and represented approximately 52% of the expected total home heating oil volume sold in a twelve month period. The propane segment's hedging activity was also designed to help it achieve its planned margins and represented approximately 5% of the expected total propane volume sold in a twelve month period. TG&E's hedging activity was also designed to help achieve its planned margins and represents a hedge on 100% of its required physical inventory of natural gas at September 30, 2000. The carrying amount of all hedging financial instruments at September 30, 2000, was approximately $1.7 million and was included in Prepaid expenses on the Consolidated Balance Sheet at that date. 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 did not incur any losses due to counterparty default. In October 2000, the Partnership adopted the provisions of the Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standard No. 133 "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133) as amended by SFAS No. 137 and No. 138. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities. It requires the recognition of all derivative instruments as assets or liabilities in the Partnership's balance sheet and measurement of those instruments at fair value and requires that a company formally document, designate and assess the effectiveness of transactions that receive hedge accounting. The Partnership periodically hedges a portion of its home heating oil, propane and natural gas purchases through futures, options, collars and swap agreements. The purpose of the hedges is to provide a measure of stability in the volatile environment of home heating oil, propane and natural gas and to manage its exposure to commodity price risk under certain existing sales commitments. The Partnership also has derivitive agreements that management has decided not to treat as hedge transactions for accounting purposes and as such, mark-to-market adjustments are recognized currently in earnings. Upon adoption of SFAS No. 133 on October 1, 2000, the Partnership recognized current assets of $12.0 million, a $1.5 million increase in net income and a $10.5 million increase in additional other comprehensive income all of which were recorded as cumulative effect of a change in accounting principle. F-11
2) Summary of Significant Accounting Policies - (continued) The accounting treatment of changes in fair value is dependent upon whether or not a derivative instrument is designated as a hedge and if so, the type of hedge. For derivatives designated as cash flow hedges, changes in fair value are recognized in other comprehensive income until the hedged item is recognized in earnings. All of the Partnership's derivative instruments entered into for the purchase of heating oil, propane and natural gas to be sold to price plan customers are designated as cash flow hedges. For derivatives recognized as fair value hedges, changes in fair value are recognized in the statement of operations and are offset by related results of the hedged item. Substantially all of the derivative instruments entered into in order to mitigate the price exposure for firm commitments relating to the purchase of heating oil, propane and natural gas to be sold to price plan customers are designated as fair value hedges. Changes in the fair value of derivative instruments, which are not designated as hedges or which do not qualify for hedge accounting are recognized currently in earnings. For the year ended September 30, 2001, the Partnership has recognized the following for derivative instruments designated as cash flow hedges: $11.1 million gain due to instruments expiring during the current year, $8.1 million loss in other comprehensive income due to the effective portion of derivative instruments outstanding at September 30, 2001, $4.2 million loss due to hedge ineffectiveness for derivative instruments outstanding at September 30, 2001 and $1.0 million loss relating to the time value writeoff of outstanding option agreements at September 30, 2001. For derivative instruments accounted for as fair value hedges, the Partnership has recognized a $3.3 million loss due to instruments expiring during the current year, and a $0.2 million gain for the change in the fair market value of derivative instruments outstanding at September 30, 2001. For derivative instruments not designated as hedging instruments, the Partnership recognized a $0.2 million gain due to instruments expiring during the year, and a $0.4 million gain for the change in fair market value of derivative instruments outstanding at September 30, 2001. All of the existing losses in accumulated other comprehensive income are expected to be reclassified into earnings over the next 12 months. Accounting Principles Not Yet Adopted In July 2001, the FASB issued Statement No. 141, "Business Combinations" and Statement No. 142, "Goodwill and Other Intangible Assets." Statement No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as for all purchase method business combinations completed after June 30, 2001. Statement No. 141 also specifies criteria that intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. Statement No. 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually in accordance with the provisions of Statement No. 142. Statement No. 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The Partnership adopted the provisions of Statement No. 141 effective July 1, 2001 and Statement No. 142 is required to be adopted effective October 1, 2002. Futhermore, any goodwill and any intangible asset determined to have an indefinite useful life that are acquired in a purchase business combination completed after June 30, 2001 will not be amortized, but will continue to be evaluated for impairment in accordance with the appropriate pre-Statement No. 142 accounting literature. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 will continue to be amortized prior to the adoption of Statement No. 142. Statement No. 141 will require upon adoption of Statement No. 142, that the Partnership evaluate its existing intangible assets and goodwill that were acquired in a prior purchase business combination, and to make any necessary reclassifications in order to conform with the new criteria in Statement No. 141 for recognition apart from goodwill. Upon adoption of Statement No. 142, the Partnership will be required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Partnership will be required to test the intangible asset for impairment in accordance with the provisions of Statement No. 142 within the first interim period. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of change in accounting principle in the first interim period. F-12
2) Summary of Significant Accounting Policies - (continued) In connection with the transitional goodwill impairment evaluation, Statement No. 142 will require the Partnership to perform an assessment of whether there is an indication that goodwill is impaired as of the date of adoption. To accomplish this the Partnership must identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of the date of adoption. The Partnership will then have up to six months from the date of adoption to determine the fair value of each reporting unit and compare it to the reporting unit's carrying amount. To the extent a reporting unit's carrying amount exceeds its fair value, an indication exists that the reporting unit's goodwill may be impaired and the Partnership must perform the second step of the transitional impairment test. In the second step, the Partnership must compare the implied fair value of the reporting unit's goodwill, determined by allocating the reporting unit's fair value to all of its assets (recognized and unrecognized) and liabilities in a manner similar to a purchase price allocation in accordance with Statement No. 141, to its carrying amount, both of which would be measured as of the date of adoption. This second step is required to be completed as soon as possible, but no later than the end of the year of adoption. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in the Partnership's statement of operations. As of September 30, 2001, the Partnership had unamortized goodwill in the amount of $263.3 million. The Partnership also had $207.4 million of unamortized identifiable intangible assets, of which $201.2 will be subject to the transition provisions of SFAS No. 141 and No. 142. Amortization expense related to goodwill was $7.4 million and $7.9 million for the year ended September 30, 2000 and 2001, respectively. Because of the extensive effort needed to comply with adopting Statements No. 141 and No. 142, it is not practicable to reasonably estimate the impact of adopting these Statements on the Partnership's financial statements at the date of this report, including whether any transitional impairment losses will be required to be recognized as the cumulative effect of change in accounting principle. In August 2001, the FASB issued Statement No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No. 143"). SFAS No. 143 requires recording the fair market value of an asset retirement obligation as a liability in the period in which a legal obligation associated with the retirement of tangible long-lived assets is incurred. SFAS No. 143 also requires recording the contra asset to the initial obligation as an increase to the carrying amount of the related long-lived asset and to depreciate that cost over the life of the asset. The liability is then increased at the end of each period to reflect the passage of time and changes in the initial fair value measurement. The Partnership is required to adopt the provisions of SFAS No. 143, effective October 1, 2002 and has not yet determined the extent of its impact, if any. In October 2001, the FASB issued Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144 addresses financial accounting and reporting for the improvement or disposal of long-lived assets. It also extends the reporting requirements to report separately as discontinued operations, components of an entity that have either been disposed of or classified as held for sale. The Partnership is required to adopt the provisions of SFAS No. 144, effective October 1, 2002 and has not yet determined the extent of its impact, if any. 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. F-13
3) Quarterly Distribution of Available Cash - (continued) 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. In August 2000, the Partnership commenced quarterly distributions on its senior subordinated units at an initial rate of $0.25 per unit. In February 2001, the Partnership decided to increase the quarterly distributions on its senior subordinated units, junior subordinated units and general partner units to $0.575 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, 2003. 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, 2003 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 four reportable segments, retail distribution of heating oil, a retail distribution of propane, reselling of natural gas and electricity, and the public master limited partnership, Star Gas Partners. Management has chosen to organize the enterprise under these four 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. F-14
4) Segment Reporting - (continued) 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, Northeast, Florida and Georgia. 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 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; as a result, a significant portion of this segment's revenue is directly related to weather conditions. TG&E operates in ten markets in the Northeast, Mid-Atlantic, Florida and the District of Columbia, where competition for energy suppliers range from independent resellers, like TG&E, to large public utilities. The public master limited partnership segment includes the office of the Chief Executive Officer and has the responsibility for maintaining investor relations and investor reporting for the Partnership. 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 ent beginning March 26, 1999, and the electric and natural gas resng segment (TG&E) was added beginning April 7, 2000. There were nter-segment sales. <TABLE> <CAPTION> (in thousands) Years Ended September 30, ------------------------------------------------------------- 2000 ------------------------------------------------------------- Statements of Heating Operations Oil Propane TG&E Partners Consol. ---------- --- ------- ---- -------- ------- <S> <C> <C> <C> <C> <C> Sales $ 570,877 $ 150,184 $ 23,603 $ -- $ 744,664 Cost of sales 403,260 76,303 22,026 -- 501,589 Delivery and branch 112,820 44,042 -- -- 156,862 Deprec. and amort 22,373 11,916 416 3 34,708 G & A expense 9,196 6,129 2,041 2,496 19,862 TG&E customer acquisition expense -- -- 2,082 -- 2,082 Unit compensation -- -- -- 649 649 --------- --------- ---------- -------- ----------- Operating income (loss) 23,228 11,794 (2,962) (3,148) 28,912 Net interest expense 17,069 9,509 635 (429) 26,784 Amortization of debt issuance costs 343 191 -- -- 534 --------- --------- ---------- -------- ----------- Income (loss) before income taxes & minority interest 5,816 2,094 (3,597) (2,719) 1,594 Minority interest in net loss of TG&E -- -- 251 -- 251 Income tax expense 400 90 2 -- 492 --------- --------- ---------- -------- ----------- Income (loss) before cumulative change in 5,416 2,004 (3,348) (2,719) 1,353 accounting principle Cumulative change in accounting principle -- -- -- -- -- --------- --------- ---------- -------- ----------- Net income (loss) $ 5,416 $ 2,004 $ (3,348) $ (2,719) $ 1,353 ========= ========= ========== ======== =========== Capital expenditures $ 3,478 $ 3,927 $ 155 $ -- $ 7,560 ========= ========= ========== ======== =========== <CAPTION> (in thousands) Years Ended September 30, ------------------------------------------------------------- 2001 ------------------------------------------------------------- Statements of Heating Operations Oil Propane TG&E Partners Consol. ---------- --- ------- ---- -------- ------- <S> <C> <C> <C> <C> <C> Sales $ 767,959 $ 226,340 $ 91,674 $ -- $ 1,085,973 Cost of sales 563,803 124,164 83,350 -- 771,317 Delivery and branch 142,968 57,091 -- -- 200,059 Deprec. and amort 28,586 13,867 1,934 9 44,396 G & A expense 10,240 6,992 12,720 5,819 35,771 TG&E customer acquisition expense -- -- 1,868 -- 1,868 Unit compensation -- -- -- 3,315 3,315 --------- --------- ---------- -------- ----------- Operating income (loss) 22,362 24,226 (8,198) (9,143) 29,247 Net interest expense 20,891 11,863 2,934 (1,961) 33,727 Amortization of debt issuance costs 506 231 -- -- 737 --------- --------- ---------- -------- ----------- Income (loss) before income taxes & minority interest 965 12,132 (11,132) (7,182) (5,217) Minority interest in net loss of TG&E -- -- -- -- -- Income tax expense 1,200 297 1 -- 1,498 --------- --------- ---------- -------- ----------- Income (loss) before cumulative change in (235) 11,835 (11,133) (7,182) (6,715) accounting principle Cumulative change in accounting principle 2,093 (229) (398) -- 1,466 Net income (loss) $ 1,858 $ 11,606 $ (11,531) $ (7,182) $ (5,249) ========= ========= ========== ======== =========== Capital expenditures $ 11,979 $ 5,390 $ 318 $ -- $ 17,687 ========= ========= ========== ======== =========== </TABLE> <TABLE> <CAPTION> (in thousands) Year Ended September 30, 1999 ------------------------------------------------- Statement of Operations Heating Oil Propane Partners Consol. ----------------------- ----------- ------- -------- ------- <S> <C> <C> <C> <C> Sales $ 116,399 $ 107,621 $ -- $ 224,020 Cost of sales 90,070 41,579 -- 131,649 Delivery and branch 45,470 41,019 -- 86,489 Depreciation and amortization 10,531 12,182 -- 22,713 General and administrative 4,882 5,395 1,440 11,717 --------- --------- --------- --------- Operating income (loss) (34,554) 7,446 (1,440) (28,548) Interest expense, net 7,128 8,307 -- 15,435 Amortization of debt issuance cos 167 180 -- 347 --------- --------- --------- ---------- Loss before income taxes (41,849) (1,041) (1,440) (44,330) Income tax expense (benefit) (11,900) (2,880) -- (14,780) --------- --------- --------- --------- Net income (loss) $ (29,949) $ 1,839 $ (1,440) $ (29,550) ========= ========= ========= --------- Capital expenditures $ 2,323 $ 5,060 $ -- $ 7,383 ========= ========= ========= ========= </TABLE> F-15
4) Segment Reporting - (continued) (in thousands) <TABLE> <CAPTION> September 30, 2000 ---------------------------------------------------- Heating (1) Balance Sheets Oil Propane TG&E Partners Consol. -------------- --- ------- ---- -------- ------- <S> <C> <C> <C> <C> <C> Assets Current assets: Cash and cash equivalents $ 6,288 $ 2,765 $ 222 $ 1,635 $ 10,910 Receivables, net 51,475 9,976 5,407 - 66,858 Inventories 21,637 8,636 4,134 - 34,407 Prepaid expenses and other current assets 12,502 1,017 2,157 - 14,815 --------- --------- -------- --------- --------- Total current assets 91,902 22,394 11,920 1,635 126,990 Property and equipment, net 39,026 132,008 266 - 171,300 Long-term portion of accounts receivable 7,282 - - - 7,282 Investment in subsidiaries - 69,309 - 143,036 - Intangibles and other assets, net 236,069 63,003 14,174 158 313,404 --------- --------- -------- --------- --------- Total assets $ 374,279 $ 286,714 $ 26,360 $ 144,829 $ 618,976 ========= ========= ======== ========= ========= <CAPTION> Liabilities and Heating (1) Partners' Capital Oil Propane TG&E Partners Consol. --- ------- ---- -------- ------- <S> <C> <C> <C> <C> <C> Current Liabilities: Accounts payable $ 11,887 $ 7,436 $ 8,551 $ - $ 27,874 Working capital Facility borrowings 17,000 800 6,600 - 24,400 Current maturities of of long-term debt 7,669 8,846 - - 16,515 Accrued expenses and other current liabilities 36,882 4,006 1,521 - 42,410 Due to affiliate (1,115) (3,674) - 4,789 - Unearned service contract revenue 15,654 - - - 15,654 Customer credit balances 26,101 9,805 2,037 - 37,943 --------- --------- -------- --------- --------- Total current liabilities 114,078 27,219 18,709 4,789 164,796 Long-term debt 186,397 122,154 1,863 - 310,414 Other long-term liabilities 4,495 93 - - 4,588 Partners' Capital: Equity Capital 69,309 137,248 5,788 140,040 139,178 --------- --------- -------- --------- --------- Total liabilities and Partners' Capital $ 374,279 $ 286,714 $ 26,360 $ 144,829 $ 618,976 ========= ========= ======== ========= ========= <CAPTION> (in thousands) September 30, 2001 ---------------------------------------------------- Heating (1) Balance Sheets Oil Propane TG&E Partners Consol. -------------- --- ------- ---- -------- ------- <S> <C> <C> <C> <C> <C> Assets Current assets: Cash and cash equivalents $ 7,181 $ 3,655 $ 102 $ 6,290 $ 17,228 Receivables, net 82,484 12,002 10,487 - 104,973 Inventories 24,735 13,181 3,214 - 41,130 Prepaid expenses and other current assets 16,921 3,523 2,349 - 21,931 --------- --------- -------- --------- ---------- Total current asset 131,321 32,361 16,152 6,290 185,262 Property and equipment, net 72,204 162,680 487 - 235,371 Long-term portion of accounts receivable 6,752 - - - 6,752 Investment in subsidiaries - 108,035 - 194,647 - Intangibles and other assets, net 381,348 77,750 12,117 219 471,434 --------- --------- -------- --------- --------- Total assets $ 591,625 $ 380,826 $ 28,756 $ 201,156 $ 898,819 ========= -======== ======== ========= ========= <CAPTION> Liabilities and Heating (1) Partners' Capital Oil Propane TG&E Partners Consol. --- ------- ---- -------- ------- <S> <C> <C> <C> <C> <C> Current Liabilities: Accounts payable $ 22,407 $ 5,682 $ 7,711 $ - $ 35,800 Working capital Facility borrowings - 8,400 5,466 - 13,866 Current maturities of of long-term debt 1,184 8,702 2,000 - 11,886 Accrued expenses and other current liabilities 63,895 10,267 1,052 2,464 77,678 Due to affiliate (185) (1,450) 2,069 (434) - Unearned service contract revenue 24,575 - - - 24,575 Customer credit balances 45,456 18,053 1,698 - 65,207 --------- --------- -------- --------- --------- Total current liabilities 157,332 49,654 19,996 2,030 229,012 Long-term debt 314,148 142,375 563 - 457,086 Other long-term liabilities 12,110 2,307 40 - 14,457 Partners' Capital: Equity Capital 108,035 186,490 8,157 199,126 198,264 --------- --------- -------- --------- --------- Total liabilities and Partners' Capital $ 591,625 $ 380,826 $ 28,756 $ 201,156 $ 898,819 ========= ========= ======== ========= ========= </TABLE> (1) The consolidated amounts include the necessary entries to eliminate the investment in Petro Holdings, Star Gas Propane and TG&E. The $10.7 million increase in expenses at TG&E was largely due to a $6.4 million provision to increase its allowance for bad debts (representing a $6.0 million increase over the prior year provision), $2.4 million of start up and organizational expenses and inclusion of a full year of general and administration expense. Since its acquisition, TG&E has struggled with customer credit deficiencies and problems collecting its receivables. TG&E currently has more than 50,000 terminated customers who collectively owe $15.5 million, virtually all of which is greater than 90 days old. This balance includes $5.3 million of accounts receivable that predated TG&E's acquisition by the Partnership. These pre-acquisition receivables were assigned no value and are not reflected on TG&E's books. Consequently, the gross amount of receivables from terminated accounts on the Company's books before bad debt reserves currently approximates $10 million. The Partnership has recently allocated substantial resources to a collection effort targeting these terminated accounts. Based on a sample group of accounts' preliminary collection results, the Partnership added $5.7 million to TG&E's bad debt provision for the year ended September 30, 2001. This brought the total bad debt reserve on terminated accounts to $6.0 million. Consequently, out of the roughly $15 million owed TG&E by terminated accounts, all but $4 million has been reserved. In addition, TG&E provided a $0.7 million bad debt provision against its active accounts receivable for the year ended September 30, 2001 bringing the total allowances to $0.9 million for active accounts at that time. In the course of 2001, TG&E has instituted entirely new credit policies including a detailed procedure to approve new accounts. Simultaneously, new information systems have been purchased and adopted to TG&E's needs. The new systems are currently being implemented at TG&E. As a result, TG&E believes its delinquency levels and bad debt experience will improve. Once the system enhancements are fully in place and all of TG&E's customers have gone through the new credit approval procedures, bad debt losses should approximate the experience of the Partnership's other two operating segments. TG&E incurred approximately $2.4 million of start up and organizational expenses involving compliance, legal and data processing costs, which were included in gerneral administrative expenses in 2001. F-16
5) Inventories The components of inventory were as follows: (in thousands) September 30, 2000 September 30, 2001 ------------------ ------------------ Propane gas $ 6,323 $ 9,546 Propane appliances and equipment 2,313 3,635 Fuel oil 14,263 12,403 Fuel oil parts and equipment 7,374 12,332 Natural gas 4,134 3,214 -------- -------- $ 34,407 $ 41,130 ======== ======== Substantially all of the Partnership's propane supplies for the Northeast retail operations are purchased under supply contracts. Certain of the supply contracts provide for minimum and maximum amounts of propane to be purchased thereunder, and provide for pricing in accordance with posted prices at the time of delivery or include a pricing formula that typically is based on current market prices. Historically, spot purchases from Mont Belvieu, Texas sources accounted for approximately one-third of the Partnership's total volume of propane purchases. In addition, the three single largest suppliers in the aggregate account for less than half of total propane purchases. The Partnership obtains home heating oil in either barge or truckload quantities, and has contracts with over 80 terminals for the right to temporarily store its heating oil at facilities not owned by the Partnership. Purchases are made pursuant to supply contracts or on the spot market. The Partnership has market price based contracts for substantially all its petroleum requirements with 12 different suppliers, the majority of which have significant domestic sources for their product, and many of which have been suppliers for over 10 years. Typically supply contracts have terms of 12 months. All of the supply contracts provide for maximum and in some cases minimum quantities, and in most cases the price is based upon the market price at the time of delivery. The Partnership is an independent reseller of natural gas and electricity to residential homeowners in deregulated markets, through its 80% 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 purchases were from major US wholesalers, who transport the natural gas to the incumbent utility company for TG&E, through purchased or assigned capacity using existing pipelines. Additionally, all of TG&E's electricity was 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 pipelines 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 readings, billing, equipment and maintenance. Customers also pay a separate delivery charge to the incumbent utility for bringing the natural gas or 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. 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. F-17
6) Property, Plant and Equipment The components of property, plant and equipment and their estimated useful lives were as follows: (in thousands) <TABLE> <CAPTION> September 30, 2000 September 30, 2001 Estimated Useful Lives ------------------ ------------------ ---------------------- <S> <C> <C> <C> Land $ 10,688 $ 17,872 Buildings and leasehold improvements 22,295 32,662 4 - 30 years Fleet and other equipment 39,600 56,359 3 - 30 years Tanks and equipment 131,901 165,275 8 - 30 years Furniture and fixtures 17,500 30,265 5 - 12 years -------- -------- Total 221,984 302,433 Less accumulated depreciation 50,684 67,062 -------- -------- Total $171,300 $235,371 ======== ======== </TABLE> 7) Intangibles and Other Assets The components of intangibles and other assets were as follows at the indicated dates: (in thousands) <TABLE> <CAPTION> September 30, 2000 September 30, 2001 ---------------------------------------------------- --------------------------------------------------- Heating Heating Propane Oil TG&E Partners Total Propane Oil TG&E Partners Total ------- --- ---- -------- ----- ------- --- ---- -------- ----- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Goodwill $ 36,622 $150,807 $ 6,629 $ - $194,058 $ 35,223 $238,377 $ 10,036 $ - $283,636 Covenants not to compete 3,586 3,314 - - 6,900 6,966 4,725 - - 11,691 Customer lists 41,272 102,759 6,077 - 150,108 59,475 174,594 2,670 - 236,739 Deferred charges 3,546 3,300 - 161 7,007 4,244 7,990 170 231 12,635 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Total intangibles 85,026 260,180 12,706 161 358,073 105,908 425,686 12,876 231 544,701 Less accumulated amortization 22,290 24,430 361 3 47,084 28,320 44,841 2,198 12 75,371 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Net intangibles 62,736 235,750 12,345 158 310,989 77,588 380,845 10,678 219 469,330 Other assets 267 319 1,829 - 2,415 162 503 1,439 - 2,104 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Intangibles and other assets $ 63,003 $236,069 $ 14,174 $ 158 $313,404 $ 77,750 $381,348 $ 12,117 $ 219 $471,434 ======== ======== ======== ======== ======== ======== ======== ======== ======== ======== </TABLE> In 1999 the Partnership acquired Petro in a four part transaction ("Star Gas / Petro Transaction"), which closed concurrently. This acquisition was accounted for under the purchase method of accounting. Merger and Exchange ------------------- Petro, Star Gas Partners and Star Gas Propane entered into a merger agreement (the "merger agreement"). Under the terms of the merger agreement, a newly formed subsidiary of Star Gas Propane was merged with Petro, with Petro surviving the merger as a wholly owned indirect subsidiary of Star Gas Propane. As a result of the merger: . each outstanding share of Petro Class A common stock, par value $0.10 per share, and Petro Class C common stock, par value $0.10 per share, other than shares that were exchanged (the "Exchange"), was converted into 0.11758 senior subordinated units (2,476,797 senior subordinated units issued in total); . each outstanding share of Petro junior convertible preferred stock was converted into 0.13064 common units (102,848 total common units); and . each outstanding share of Petro Series C exchangeable preferred stock due 2009 was converted into the right to receive $10.69 in cash per share plus accrued and unpaid dividends, except for an aggregate of 505,000 shares of Series C preferred stock that were converted into an aggregate of 400,531 common units, plus accrued and unpaid dividends on the preferred, with the right to receive an additional 175,000 Senior Subordinated Units contingent upon Petro achieving certain operating results. F-18
7) Intangibles and Other Assets - (continued) The Exchange occurred immediately prior to the merger and was comprised of the following elements. (a) Certain holders of Petro common stock, consisting of Irik P. Sevin, Audrey L. Sevin, Hanseatic Corp. and Hanseatic Americas Inc., who are referred to as the "LLC Owners," formed Star Gas LLC, to which they contributed their outstanding shares of Petro common stock in exchange for all of the limited liability company interests in Star Gas LLC. Star Gas LLC contributed those shares to Star Gas Partners in exchange for general partner units (325,729 general partner units). In addition, the LLC Owners contributed their remaining shares of Petro common stock to Star Gas Partners in exchange for junior subordinated units (345,364 junior subordinated units). (b) Other Petro common stockholders who were affiliates of Petro contributed shares of Petro common stock to Star Gas Partners in exchange for Star Gas Partners senior subordinated units. The senior subordinated units, junior subordinated units and general partnership units can earn, pro rata, 303,000 additional senior subordinated units each year that the heating oil segment meets certain financial goals. A maximum of 909,000 additional senior subordinated units can be issued. Financings and Refinancings --------------------------- Star Gas Partners offered and sold to the public 9.0 million common units in an equity offering (including 230,000 overallotment common units), the net proceeds of which were approximately $118.8 million. Petro offered and sold, in a private placement, $90.0 million of senior secured notes, the net proceeds of which were approximately $87.6 million. Star Gas Partners and Petro Holdings guaranteed the notes. All of the $118.8 million of net proceeds of the equity offering, together with the $87.6 million of net proceeds from the debt offering and $5.4 million of Petro's cash were used: . to redeem $80.2 million principal amount of Petro's 12 1/4% Senior Subordinated Debentures due 2005, $48.7 million principal amount of Petro's 10 1/8% Senior Subordinated Notes due 2003, $74.3 million principal amount of Petro's 9 3/8% Senior Subordinated Debentures due 2006 and the $17.4 million of Petro's 12 7/8% preferred stock at an aggregate redemption price of $201.3 million; . to repurchase Petro's 1989 preferred stock at an aggregate redemption price of $4.2 million; and . to pay $6.3 million of the expenses of the transaction. In addition, Star Gas Partners issued 0.4 million of common units to redeem certain holder's $12.6 million Petro 12 7/8% preferred stock. New General Partner ------------------- Since Star Gas Corporation is a wholly-owned subsidiary of Petro, which became a subsidiary of the Partnership in the transaction, it was no longer able to serve as Star Gas Partners' general partner. Star Gas Partners' new general partner is Star Gas LLC, which is owned by the LLC Owners. The Partnership agreement allows for the removal of the General Partner by a 2/3 vote of the common unitholders. Star Gas LLC's sole business activity is being the general partner. Amendment of Partnership Agreement ---------------------------------- In order to complete the transaction, certain amendments to the Partnership agreement were required, including increasing the Minimum Quarterly Distribution ("MQD") from $0.55 to $0.575 per unit, or $2.30 per unit annually. The increase in the MQD raised the threshold needed to end the subordination period (see footnote 3). F-19
7) Intangibles and Other Assets - (continued) The table below summarizes the allocation by the Partnership of the excess of purchase price over book value related to the 1999 acquisition of Petro. The allocation of the purchase price was based on the results of an appraisal of property, plant and equipment, customer lists and the March 26, 1999 recorded values for tangible assets and liabilities as follows: <TABLE> <S> <C> (in thousands) Consideration given for the exchange of Petro shares $ 20,822 Fair market value of Petro's assets and liabilities as of March 26, 1999: Current assets (107,102) Property, plant and equipment (40,109) Value of Petro's investment in the Partnership (21,864) Current liabilities 78,792 Long-term debt 276,568 Deferred income taxes 12,000 Other liabilities 7,251 Preferred stock 12,978 Junior preferred stock 1,459 --------- Sub-total 219,973 --------- Total value assigned to intangibles and other assets $ 240,795 ========= Consisting of: Customer lists $ 94,000 Goodwill 146,080 Other assets 715 --------- Total $ 240,795 ========= </TABLE> The fair market value for property, plant and equipment, excluding real estate, was established using the replacement cost approach method. The market approach was used in valuing the real estate. The value assigned to customer lists was derived using a discounted cash flow analysis. The cash attributable to the customer lists were discounted back at an equity risk adjusted cost of capital to the net present value. Any excess was attributable to goodwill. 8) Long-Term Debt and Bank Facility Borrowings Long-term debt consisted of the following at the indicated dates: <TABLE> <CAPTION> September 30, September 30, (in thousands) 2000 2001 ------------- ------------- <S> <C> <C> Propane Segment: 8.04% First Mortgage Notes (a) $ 85,000 $ 83,077 7.17% First Mortgage Notes (a) 11,000 11,000 8.70% First Mortgage Notes (a) 27,500 27,500 7.89% First Mortgage Notes (a) - 29,500 Acquisition Facility Borrowings (b) 7,500 - Working Capital Facility Borrowings (b) 800 8,400 Heating Oil Segment: 7.92% Senior Notes (c) 90,000 90,000 9.0% Senior Notes (d) 61,779 57,170 8.25% Senior Notes (e) - 103,000 10.25% Senior and Subordinated Notes (f) 4,137 2,000 8.96% Senior Notes (g) - 40,000 Acquisition Facility Borrowings (h) 34,000 16,000 Working Capital Facility Borrowings(h) 17,000 - Acquisition Notes Payable (i) 1,135 4,147 Subordinated Debentures (j) 3,015 3,015 TG&E Segment: Working Capital Facility Borrowings (k) 6,600 5,466 Acquisition Facility Borrowings (k) 1,400 2,000 14.5% Junior Convertible Subordinated Notes Payable (l) 463 563 --------- --------- 351,329 482,838 Less current maturities (16,515) (11,886) Less working capital facility borrowings (24,400) (13,866) --------- --------- Total $ 310,414 $ 457,086 ========= ========= </TABLE> F-20
8) Long-Term Debt and Bank Facility Borrowings - (continued) (a) In December 1995, Star Gas Propane assumed $85.0 million of first mortgage notes (the "First Mortgage Notes") with an annual interest rate of 8.04% in connection with the initial Partnership formation. In January 1998, Star Gas Propane issued an additional $11.0 million of First Mortgage Notes with an annual interest rate of 7.17%. In March 2000, the Star Gas Propane segment issued $27.5 million of 8.70% First Mortgage Notes. In March 2001, the Star Gas segment issued $29.5 million of senior notes with an average annual interest rate of 7.89% per year. Obligations under the First Mortgage Note Agreements are secured, on an equal basis with Star Gas Propane's obligations under the Star Gas Propane Bank Credit Facilities, by a mortgage on substantially all of the real property and liens on substantially all of the operating facilities, equipment and other assets of Star Gas Propane. The First Mortgage Notes will require semiannual prepayments, without premium on the principal thereof, beginning on March 15, 2001 and have a final maturity of March 30, 2015. Interest on the Notes is payable semiannually in March and September. The First Mortgage Note Agreements contain various restrictive and affirmative covenants applicable to Star Gas Propane; the most restrictive of these covenants relate to the incurrence of additional indebtedness and restrictions on dividends, certain investments, guarantees, loans, sales of assets and other transactions. (b) The Star Gas Propane Bank Credit Facilities currently consist of a $25.0 million Acquisition Facility and a $18.0 million Working Capital Facility. At September 30, 2001, $8.4 million was borrowed under the Working Capital Facility. The agreement governing the Bank Credit Facilities contains covenants and default provisions generally similar to those contained in the First Mortgage Note Agreements. The Bank Credit Facilities bear interest at a rate based upon, at the Partnership's option, either the London Interbank Offered Rate plus a margin or a Base Rate (each as defined in the Bank Credit Facilities). The Partnership is required to pay a fee for unused commitments which amounted to $0.1 million in each of fiscal years ending September 30, 1999, through September 30, 2001. For fiscal 2000 and 2001, the weighted average interest rate on borrowings under these facilities was 8.68% and 8.0%, respectively. At September 30, 2001 the interest rate on the borrowings outstanding was 6.825%. The Working Capital Facility expires on June 30, 2003, but may be extended annually thereafter with the consent of the banks. Borrowings under the Acquisition Facility will revolve until September 30, 2002, after which time any outstanding loans thereunder, will amortize in quarterly principal payments with a final payment due on September 30, 2005. However, there must be no amount outstanding under the Working Capital Facility for at least 30 consecutive days during each fiscal year. (c) Petro issued $90.0 million of 7.92% Senior Secured Notes in six separate series in a private placement to institutional investors as part of its acquisition by the Partnership. The Senior Secured Notes are guaranteed by Star Gas Partners and are secured equally and ratably with Petro's existing senior debt and bank credit facilities by Petro's cash, accounts receivable, notes receivable, inventory and customer list. Each series of Senior Secured Notes will mature between April 1, 2003 and April 1, 2014. Only interest on each series is due semiannually. On the last interest payment date for each series, the outstanding principal amount is due and payable in full. The note agreements for the senior secured notes contain various negative and affirmative covenants, the most restrictive of the covenants include restrictions on payment of dividends or other distributions by Star Gas Partners on any partnership interest if the ratio of consolidated pro forma operating cash flow to consolidated pro forma interest expense, do not meet the requirements in the agreement for the period of the four most recent fiscal quarters ending on or prior to the date of the dividend or distribution. (d) The Petro 9.0% Senior Secured Notes, which pay interest semiannually, were issued under agreements that are substantially identical to the agreements under which the $90.0 million of Senior Secured Notes were issued, including negative and affirmative covenants. The 9.0% Senior Notes are guaranteed by Star Gas Partners. The notes have various sinking fund payments of which the largest are $11.6 million due on October 1, 2001, and a final maturity payment of $45.3 million due on October 1, 2002. All such notes are redeemable at the option of the Partnership, in whole or in part upon payment of a premium as defined in the note agreement. The holders of these notes have the right to extend $30.0 million of the maturity due on October 1, 2002 for a one year period at an annual rate of 10.9%. In August 2001, the holders of these notes exercised their option to extend $15.0 million of the original maturities due on October 1, 2001 to October 1, 2002. F-21
8) Long-Term Debt and Bank Facility Borrowings - (continued) (e) The Petro 8.25% Senior Notes which pay interest semiannually also were issued under agreements that are substantially identical to the agreement under which the $90.0 million and 9.0% Senior Notes were issued. These notes are also guaranteed by Star Gas Partners. The largest series has a maturity date of August 1, 2006 in the amount of $73.0 million. The remaining series are due in equal sinking fund payments due August 1, 2009 and ending on August 1, 2013. (f) The Petro 10.25% Senior and Subordinated Notes which pay interest quarterly also were issued under agreements that are substantially identical to the agreements under which the $90.0 million and the 9.0% Senior Notes were issued. These notes are also guaranteed by Star Gas Partners. Petro is required to make a final maturity payment of $2.0 million on January 15, 2002. No premium is payable in connection with these required payments. In connection with a one year extension exercised by the noteholders the interest rate increased to 14.1%. (g) The Petro 8.96% Senior Notes which pay interest semiannually, were issued under agreements that are substantially identical to the agreements under which the Partnership's other Senior Notes were issued. These notes are also guaranteed by Star Gas Partners. These notes were issued in three separate series. The largest series has annual sinking fund payments of $2.8 million due beginning November 1, 2004 and ending November 1, 2010. The other two series are due on November 1, 2004 and November 1, 2005. (h) The Petro Bank Facilities consist of three separate facilities; a $123 million working capital facility, a $20 million insurance letter of credit facility and a $50 million acquisition facility. At September 30, 2001 there was no outstanding borrowings under the working capital facility, $18.1 million of the insurance letter of credit facility was used, $16.0 million was outstanding under the acquisition facility, along with an additional $4.0 million outstanding from the acquisition facility in the form of letter of credits (see footnote i below). The working capital facility and letter of credit facility will expire on June 30, 2004. The acquisition facility will convert to a term loan on June 30, 2004 which will be payable in eight equal quarterly principal payments. Amounts borrowed under the working capital facility are subject to a requirement to maintain a zero balance for 45 consecutive days during the period from April 1 to September 30 of each year. In addition, each facility will bear an interest rate that is based on either the London Interbank Offer Rate or another base rate plus a set percentage. The bank facilities agreement contains covenants and default provisions generally similar to those contained in the note agreement for the senior secured notes. The Partnership is required to pay a commitment fee, which amounted to $0.5 million for both of the years ended September 30, 2000 and 2001. For the years ended September 30, 2000 and 2001, the weighted average interest rate for borrowings under these facilities was 8.15% and 8.46%, respectively. As of September 30, 2001, the interest rate on the borrowings outstanding was 5.87% (i) These Petro notes were issued in connection with the purchase of fuel oil dealers and other notes payable and are due in monthly and quarterly installments. Interest is at various rates ranging from 7% to 15% per annum, maturing at various dates through 2007. Approximately $4.0 million of letter of credits issued under the Petro Bank Acquisition Facility are issued to support these notes. (j) Petro also has outstanding $1.3 million of 10 1/8% Subordinated Debentures due 2003, $0.7 million of 9 3/8% Subordinated Notes due 2006 and $1.1 million of 12 1/4% Subordinated Notes due 2005. In October 1998, the indentures under which the 10 1/8%, 9 3/8% and 12 1/4% subordinated notes were issued were amended to eliminate substantially all of the covenants provided by the indentures. (k) The TG&E Bank Facilities currently consist of a $3.0 million Acquisition Facility and a $15.4 million Working Capital Facility and are secured by substantially all of the assets of TG&E. At September 30, 2001, $2.0 million and $5.5 million was borrowed under the Acquisition Facility and Working Capital Facility, respectively. These facilities are guaranteed by Star Gas Partners. The agreement covering the Bank Credit Facilities contains various restrictive and affirmative covenants and default provisions applicable to TG&E; the most restrictive of these covenants relate to the incurrence of additional indebtedness and restrictions on certain investments, guarantees, loans, sale of assets and other transactions. The Bank Credit Facilities bear interest at a rate based upon, at the Partnership's option, either the London Interbank Offered Rate plus a margin or a Base Rate (each as defined in the Bank Credit Facilities). The Partnership is required to pay a fee for unused commitments, which amounts to less than $0.1 million for fiscal 2000 and 2001. For fiscal 2001, the weighted average interest rate on borrowings under these facilities was 8.6%. At September 30, 2001 the interest rate on the borrowings outstanding was 5.67%. The Working Capital Facility will expire on March 30, 2002. The Acquisition Facility will revolve until March 30, 2002, after which time any outstanding loans thereunder; will be due as a single payment on September 30, 2002. F-22
8) Long-Term Debt and Bank Facility Borrowings - (continued) (l) These TG&E notes were issued to the minority interest equity holders of TG&E and are due on December 31, 2005. These notes bear interest at a rate of 14.5% and are convertible, at the option of the holder, into common shares of TG&E at the rate of one share for each $23.333 in principal amount of the convertible notes. As of September 30, 2001, the Partnership was in compliance with all debt covenants. As of September 30, 2001, the maturities during fiscal years ending September 30 are set forth in the following table: (in thousands) 2002 $ 25,752 2003 71,410 2004 22,516 2005 49,224 2006 114,197 Thereafter 199,739 -------- $482,838 ======== 9) Acquisitions In August 2001, the Partnership completed the purchase of Meenan Oil Co., Inc., believed to be the third largest home heating oil dealer in the United States; for $131.8 million. During fiscal 2001, the Partnership also purchased twelve other unaffiliated heating oil dealers for $52.2 million. In addition to these thirteen unaffiliated oil dealers, acquired during fiscal 2001, the Partnership also acquired nine unaffiliated retail propane dealers for $60.8 million. During fiscal 2000, the Partnership acquired nine unaffiliated retail heating oil dealers, five 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 $59.6 million. The following table indicates the allocation of the aggregate purchase price paid and the respective periods of amortization assigned for the 2000 and 2001 acquisitions. <TABLE> <CAPTION> (in thousands) 2000 2001 Useful Lives -------- -------- ------------ <S> <C> <C> <C> Land $ 1,794 $ 7,002 - Buildings 650 8,816 30 years Furniture and equipment 679 2,236 10 years Fleet 4,103 14,995 5-30 years Tanks and equipment 16,049 30,753 5-30 years Customer lists 17,458 84,976 6-15 years Restrictive covenants 4,539 4,742 5 years Goodwill 18,170 84,401 25 years Minority interest 1,578 - - Working capital (5,396) 6,911 - -------- -------- Total $ 59,624 $244,832 ======== ======== </TABLE> The acquisitions were accounted for under the purchase method of accounting. Purchase prices have been allocated to the acquired assets and liabilities based on their respective fair market values on the dates of acquisition. The purchase prices in excess of the fair values of net assets acquired were classified as intangibles in the Consolidated Balance Sheets. Sales and net income have been included in the Consolidated Statements of Operations from the respective dates of acquisition. F-23
9) Acquisitions - (continued) 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) <TABLE> <CAPTION> Years Ended September 30, ------------------------------------- 2000 2001 ------------- ----------- <S> <C> <C> Sales $ 1,187,261 $1,418,876 ============= ========== Net income $ 11,228 $ 11,497 ============= ========== General Partner's interest in net income $ 161 $ 164 ============= ========== Limited Partners' interest in net income $ 11,067 $ 11,333 ============= ========== Basic net income per limited partner unit $ 0.42 $ 0.43 ============= ========== Diluted net income per limited partner unit $ 0.41 $ 0.42 ============= ========== </TABLE> 10) Employee Benefit Plans Propane Segment The propane segment has a 401(k) plan, which covers certain eligible non-union and union employees. Subject to IRS limitations, the 401(k) plan provides for each employee to contribute from 1.0% to 15.0% of compensation. The propane segment contributes to non-union participants a matching amount up to a maximum of 3.0% of compensation. Aggregate matching contributions made to the 401(k) plan during fiscal 1999, 2000 and 2001 were $0.3 million, $0.4 million and $0.4 million, respectively. For the fiscal years 1999, 2000 and 2001 the propane segment made monthly contributions on behalf of its union employees to union sponsored defined benefit plans of $0.4 million, $0.4 million and $0.5 million, respectively. Heating Oil Segment The heating oil segment has a 401(k) plan, which covers certain eligible non-union and union employees. Subject to IRS limitations, the 401(k) plan provides for each employee to contribute from 1.0% to 17.0% of compensation. The Partnership makes a 4% core contribution of a participant's compensation and matches 2/3 of each amount a participant contributes up to a maximum of 2.0% of a participant's compensation. The Partnership's aggregate contributions to the heating oil segment's 401(k) plan during fiscal 1999, 2000 and 2001 were $1.5 million, $2.7 million and $2.7 million, respectively. As a result of the Petro acquisition, the Partnership assumed Petro's pension liability. Effective December 31, 1996, the heating oil segment consolidated all of its defined contribution pension plans and froze the benefits for non-union personnel covered under defined benefit pension plans. In 1997, the heating oil segment froze the benefits of its New York City union defined benefit pension plan as a result of operation consolidations. Benefits under the frozen defined benefit plans were generally based on years of service and each employee's compensation. As part of the Meenan acquisition, the Partnership assumed the pension plan obligations and assets for Meenan's company sponsored plan. This plan will be frozen and merged into the Partnership's defined benefit pension for non-union personnel as of January 1, 2002. The Partnership's pension expense for all defined benefit plans during fiscal 1999, 2000 and 2001 were $0.2 million, $0.3 million and $0.2 million, respectively. F-24
10) Employee Benefit Plans - (continued) The following tables provide a reconciliation of the changes in the heating oil segment's plan benefit obligations, fair value of assets, and a statement of the funded status at the indicated dates: <TABLE> <CAPTION> (in thousands) Year Ended Year Ended September 30, September 30, Reconciliation of Benefit Obligations 2000 2001 ------------------------------------- ------------- ------------- <S> <C> <C> Benefit obligations at beginning of year $ 24,486 $ 24,021 Service cost - 36 Interest cost 1,778 1,720 Actuarial loss 624 694 Benefit payments (1,524) (2,242) Settlements (1,343) - Meenan's benefit obligations assumed - 32,914 -------- -------- Benefit obligation at end of year $ 24,021 $ 57,143 ======== ======== Reconciliation of Fair Value of Plan Assets ------------------------------------------- Fair value of plan assets at beginning of year $ 21,069 $ 21,473 Actual return on plan assets 1,217 (1,079) Employer contributions 2,054 2,090 Benefit payments (1,524) (2,241) Settlements (1,343) - Meenan's asset assumed - 27,130 -------- -------- Fair value of plan assets at end of year $ 21,473 $ 47,373 ======== ======== Funded Status ------------- Benefit obligation $ 24,021 $ 57,143 Fair value of plan assets 21,473 47,373 Amount included in comprehensive income - (4,149) Unrecognized net actuarial (gain) loss (659) 4,025 -------- -------- Prepaid (accrued) benefit cost $ (3,207) $ (9,894) ======== ======== Components of Net Periodic Benefit Cost --------------------------------------- Service cost $ - $ 36 Interest cost 1,778 1,720 Expected return on plan assets 1,745 1,795 Net amortization 87 240 Settlement loss 210 - -------- -------- Net periodic benefit cost $ 330 $ 201 -------- -------- Weighted-Average Assumptions Used in the Measurement of the ----------------------------------------------------------- Partnership's Benefit Obligation as of the period indicated ----------------------------------------------------------- Discount rate 7.50% 7.25% Expected return on plan assets 8.50% 8.50% Rate of compensation increase N/A N/A </TABLE> In addition, the heating oil segment made contributions to union-administered pension plans of $1.1 million for fiscal 1999, $3.5 million for fiscal 2000 and $4.6 million for fiscal 2001. The Partnership recorded an additional minimum pension liability for underfunded plans of $4.1 million as of September 30, 2001, representing the excess of unfunded accumulated benefit obligations over plan assets. A corresponding amount is recognized as an intangible asset except to the extent that these additional liabilities exceed the related unrecognized prior service costs and net transition obligation, in which case the increase in liabilities is charged as a reduction of partner's capital of $4.1 million as of September 30, 2001. F-25
11) Income Taxes Income tax expense (benefit) was comprised of the following for the indicated periods: (in thousands) Years Ended September 30, --------------------------------------- 1999 2000 2001 ---- ---- ---- Current: Federal $ - $ - $ - State 166 492 1,498 Deferred (14,946) - - -------- -------- -------- $(14,780) $ 492 $ 1,498 ======== ======== ======== The sources of the deferred income tax expense (benefit) and the tax effects of each were as follows: <TABLE> <CAPTION> (in thousands) Years Ended September 30, --------------------------- 2000 2001 ---- ---- <S> <C> <C> Excess of tax over book (book over tax) depreciation $ (619) $ 77 Excess of (book over tax) amortization expense (2,252) (2,616) Excess of book over tax vacation expense (172) (98) Excess of tax over book restructuring expense 212 68 Excess of book over tax bad debt expense (118) (5,233) Excess of tax over book hedge accounting - 782 Excess of tax over book supplemental benefit expense 262 200 Excess of tax over book pension contribution 692 726 Other, net 12 - Utilization of (increase in) net operating loss carryforward 2,054 - Recognition of tax benefit of net operating loss to the extent of current and previous recognized temporary differences - (1,862) Change in valuation allowance (71) 7,956 ------- ------- $ - $ - ======= ======= </TABLE> The components of the net deferred taxes and the related valuation allowance for the years ended September 30, 2000 and September 30, 2001 using current rates are as follows: <TABLE> <CAPTION> (in thousands) Years Ended September 30, ----------------------------- Deferred Tax Assets: 2000 2001 -------------------- ---- ---- <S> <C> <C> Net operating loss carryforwards $ 26,471 $ 28,333 Excess of book over tax vacation expense 1,929 2,027 Excess of book over tax restructuring expense 322 254 Excess of book over tax bad debt expense 388 5,621 Excess of book over tax supplemental benefit expense 447 247 Other, net 309 309 -------- -------- Total deferred tax assets 29,866 36,791 Valuation allowance (16,377) (24,333) -------- -------- Net deferred tax assets $ 13,489 $ 12,458 ======== ======== Deferred Tax Liabilities: ------------------------ Excess of tax over book depreciation $ 6,977 $ 7,054 Excess of tax over book amortization 4,762 2,146 Excess of tax over book pension contribution 1,750 2,476 Excess of tax over book hedge accounting - 782 -------- -------- Total deferred tax liabilities $ 13,489 $ 12,458 ======== ======== Net deferred taxes $ - $ - ======== ======== </TABLE> F-26
11) Income Taxes - (continued) In order to fully realize the net deferred tax assets the Partnership's corporate subsidiaries will need to generate future taxable income. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. Based upon the level of current taxable income and projections of future taxable income of the Partnership's corporate subsidiaries over the periods which the deferred tax assets are deductible, management believes it is more likely than not that the Partnership will realize the benefits of these deductible differences, net of existing valuation allowance at September 30, 2001. The amount of deferred tax assets considered realizable, however, could be reduced if estimates of future taxable income during the carryforward period are reduced. At September 30, 2001, the Partnership had net income tax loss carryforwards for Federal income tax reporting purposes of approximately $69 million of which approximately $18.6 million are limited in accordance with Federal income tax law. The losses are available to offset future Federal taxable income through 2021. 12) Lease Commitments The Partnership has entered into certain operating leases for office space, trucks and other equipment. The future minimum rental commitments at September 30, 2001 under operating leases having an initial or remaining non-cancelable term of one year or more are as follows: <TABLE> <CAPTION> (in thousands) Heating Oil Propane Segment Segment TG&E Total ----------- ---------- ------- --------- <S> <C> <C> <C> <C> 2002 $ 5,888 $ 1,751 $ 119 $ 7,758 2003 6,163 1,464 107 7,734 2004 5,619 1,177 18 6,814 2005 4,196 524 - 4,720 2006 3,455 305 - 3,760 Thereafter 14,158 993 - 15,151 ----------- --------- ------- --------- Total minimum lease payments $ 39,479 $ 6,214 $ 244 $ 45,937 =========== ========= ======= ========= </TABLE> The Partnership's rent expense was $4.4 million, $8.0 million and $9.0 million in 1999, 2000 and 2001, respectively. 13) Unit Grants In June 2000, the Partnership granted 552 thousand restricted senior subordinated units to senior management and outside directors. These units were granted under the Partnership's Employee and Director Incentive Unit Plans. One-fifth of the units immediately vested with the remaining units vesting annually in four equal installments if the Partnership achieves specified performance objectives for each of the respective fiscal years. The Partnership recognized $.6 million and $2.7 million of unit compensation expense for these units for the years ended September 30, 2000 and 2001, respectively. In September 2000, the Partnership granted 350 thousand unit appreciation rights and 87 thousand restricted senior subordinated units to Irik P. Sevin. The unit appreciation rights vest in four equal installments on January 31, 2001, December 1, 2001, December 1, 2002 and December 1, 2003. The exercise price for these unit appreciation rights is $8.625. Mr. Sevin will be entitled to receive payment in cash for these rights equal to the excess of the fair market value of a senior subordinated unit on the vesting date over the exercise price. The grant of restricted senior subordinated units will vest in four equal installments on December 1 of 2001 through 2004. Distributions on the restrictive units will accrue to the extent declared. The Partnership recognized $476 of unit compensation expense for the restricted senior subordinated units and $2,448 of compensation expense for the unit appreciation rights for the year ended September 30, 2001. F-27
14) Supplemental Disclosure of Cash Flow Information <TABLE> <CAPTION> (in thousands) Years Ended September 30, --------------------------------------------- 1999 2000 2001 ---- ---- ---- <S> <C> <C> <C> Cash paid during the period for: Income taxes $ 106 $ 4,047 $ 1,298 Interest $ 15,703 $ 28,912 $ 31,145 Non-cash investing activities: Acquisitions: Net long-term assets $ (2,945) $ - $(12,526) Increase in assumed pension obligation $ - $ - $ 5,784 Accrued expense $ - $ - $ 6,742 Deferred income tax liability $ 2,945 $ - $ - Non-cash financing activities: Issuance of Common Units $ 6,858 $ - $ - Redemption of preferred stock $ (6,858) $ - $ - </TABLE> 15) Commitments and Contingencies In the ordinary course of business, the Partnership is threatened with, or is named in, various lawsuits. The Partnership is not a party to any litigation, which individually or in the aggregate could reasonably be expected to have a material adverse effect on the Partnership. 16) Related Party Transactions Prior to March 26, 1999, the Partnership was managed by the Star Gas Corporation, a wholly owned subsidiary of Petro. Pursuant to the Partnership Agreement that was in effect at the time, Star Gas Corporation was entitled to reimbursement for all direct and indirect expenses incurred or payments it made on behalf of the Partnership, and all other necessary or appropriate expenses allocable to the Partnership or otherwise reasonably incurred by Star Gas Corporation in connection with operating the Partnership's business. Indirect expenses were allocated to the Partnership on a basis consistent with the type of expense incurred. For example, services performed by employees of Star Gas Corporation on behalf of the Partnership were reimbursed on the basis of hours worked and rent expense was reimbursed on the proportion of the square footage leased by the Partnership. For the fiscal year ended September 30, 1999 (until the Star Gas / Petro Transaction resulting in Star Gas Corporation being replaced as the General Partner by Star Gas LLC), the Partnership reimbursed Star Gas Corporation and Petro $10.2 million, representing salary, payroll tax and other compensation paid to the employees of the Star Gas Corporation. In addition, the Partnership reimbursed Petro $0.4 million for the fiscal year ended September 30, 1999, relating to the Partnership's share of the costs incurred by Petro in conducting the operations of a certain shared branch location, which included managerial services. 17) Subsequent Events Cash Distribution On October 26, 2001, the Partnership announced that it would pay cash distributions of $0.575 per unit on all units for the quarter ended September 30, 2001. The distributions were paid on November 14, 2001 to holders of record as of November 5, 2001. Additionally, as a result of the heating oil segment achieving certain financial test specified in the Partnership agreement - 303,000 Senior Subordinated Units were distributed proportionally to the Senior Subordinated, Junior Subordinated and General Partner Unitholders of record as of November 5, 2001. Holders of Senior Subordinated, Junior Subordinated and General Partner units received one additional Senior Subordinated unit for every 11.1807 Senior Subordinated, Junior Subordinated or General Partner unit held as of the November 5/th/ record date. Acquisitions On October 23, 2001, the Partnership completed the acquisition of certain assets of a retail propane distributor located in New York, with annual propane sales of approximately six million gallons. F-28
18) Disclosures About the Fair Value of Financial Instruments Cash, Accounts Receivable, Notes Receivable and Other Current Assets, Bank -------------------------------------------------------------------------- Facility Borrowings, Accounts Payable and Accrued Expenses ---------------------------------------------------------- The carrying amount approximates fair value because of the short maturity of these instruments. Long-Term Debt -------------- The fair values of each of the Partnership's long-term financing instruments, including current maturities, are based on the amount of future cash flows associated with each instrument, discounted using the Partnership's current borrowing rate for similar instruments of comparable maturity. The estimated fair value of the Partnership's long-term debt is summarized as follows: (in thousands) At September 30, 2000 At September 30, 2001 ----------------------- ------------------------ Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value ------ ---------- ------ ---------- Long-term debt $326,929 $320,540 $468,972 $470,371 Limitations ----------- Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. 19) Earnings Per Limited Partner Units <TABLE> <CAPTION> (in thousands, except per unit data) September 30, ----------------------------------------- 1999 2000 2001 ---- ---- ---- <S> <C> <C> <C> Income (loss) before cumulative effect of change in accounting Principle per Limited Partner unit: Basic $ (2.53) $ .07 $ (.30) Diluted $ (2.53) $ .07 $ (.30) Cumulative effect of change in accounting principle per Limited Partner unit: Basic - - $ .07 Diluted - - $ .07 Net income (loss) per Limited Partner unit: Basic $ (2.53) $ .07 $ (.23) Diluted $ (2.53) $ .07 $ (.23) Basic Earnings Per Unit: ----------------------- Net income (loss) $(29,550) $ 1,353 $ (5,249) Less: General Partner's interest in net income (loss) (587) 24 (75) -------- -------- -------- Limited Partner's interest in net income (loss) $(28,963) $ 1,329 $ (5,174) ======== ======== ======== Common Units 8,830 15,438 19,406 Senior Subordinated Units 1,283 2,505 2,688 Junior Subordinated Units 179 345 345 Subordinated Units 1,155 - - -------- -------- -------- Weighted average number of Limited Partner units outstanding 11,447 18,288 22,439 ======== ======== ======== Basic earnings (losses) per unit $ (2.53) $ .07 $ (.23) ======== ======== ======== Diluted Earnings Per Unit: ------------------------- Effect of dilutive securities $ - $ - $ - -------- -------- -------- Limited Partner's interest in net income (loss) $(28,963) $ 1,329 $ (5,174) ======== ======== ======== Effect of dilutive securities - - - -------- -------- -------- Weighted average number of Limited Partner units outstanding 11,447 18,288 22,439 ======== ======== ======== Diluted earnings (losses) per unit $ (2.53) $ .07 $ (.23) ======== ======== ======== </TABLE> Fiscal 2001 fully diluted per unit does not include 33 common units granted to Mr. Sevin in December 2001 as well as the 110 subordinated units that vested pursuant to the employee incentive plan in December 2001 and the 303 senior subordinated units distributed in November 2001 pursuant to the heating oil segment achieving certain financial test because the impact of these issuances are antidilutive. F-29
20) Selected Quarterly Financial Data (unaudited) 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 and 45% of its volume in the second fiscal quarter of each year. The Partnership generally realizes net income in both of these quarters and net losses during the quarters ending June and September. The results of operations for the year ended September 30, 1999, include Petro's results of operations from March 26, 1999. Since the heating oil division was acquired after the heating season, the results for the year ended September 30, 1999 include expected third and fourth fiscal quarter losses but do not include the profits from the heating season. Accordingly, results of operations for the year ended September 30, 1999 presented are not indicative of the results to be expected for full year. The TG&E acquisition was made on April 7, 2000. Accordingly, the results of operations for the year ended September 30, 2000 only include TG&E's results from April 7, 2000. <TABLE> <CAPTION> (in thousands) Three Months Ended ------------------------------------------------------------------------- December 31, 2000 March 31, 2001 June 30, 2001 September 30, 2001 Total ----------------- -------------- ------------- ------------------ ----------- <S> <C> <C> <C> <C> <C> Sales $ 323,504 $ 470,447 $ 166,052 $ 125,970 $ 1,085,973 Operating income (loss) 25,186 74,191 (23,629) (46,501) 29,247 Income (loss) before taxes, minority interest and cumulative effect of change in accounting principle 16,924 65,037 (31,677) (55,501) (5,217) Net income (loss) 17,674 64,114 (31,791) (55,246) (5,249) Limited Partner interest in net income (loss) 17,391 63,150 (31,342) (54,373) (5,174) Net income (loss) per Limited Partner Unit Basic/(a)/ $ 0.87 $ 2.86 $ (1.38) $ (2.18) $ (0.23) Limited Partner Unit Diluted/(a)/ $ 0.86 $ 2.85 $ (1.38) $ (2.18) $ (0.23) </TABLE> <TABLE> <CAPTION> Three Months Ended ------------------------------------------------------------------------ December 31, 1999 March 31, 2000 June 30, 2000 September 30, 2000 Total ----------------- -------------- ------------- ------------------ --------- <S> <C> <C> <C> <C> <C> Sales $ 186,886 $ 321,695 $ 130,163 $ 105,920 $ 744,664 Operating income (loss) 16,080 58,930 (15,448) (30,650) 28,912 Income (loss) before taxes and minority interest 9,478 51,902 (22,197) (37,589) 1,594 Net income (loss) 9,365 51,687 (21,991) (37,708) 1,353 Limited Partner interest in net income (loss) 9,191 50,772 (21,617) (37,017) 1,329 Net income (loss) per Limited Partner Unit Basic and Diluted/(a)/ $ 0.53 $ 2.80 $ (1.15) $ (1.95) $ .07 </TABLE> <TABLE> <CAPTION> Three Months Ended ----------------------------------------------------------------------------- December 31, 1998 March 31, 1999 June 30, 1999 September 30, 1999 Total ----------------- --------------- ---------------- ------------------- --------- <S> <C> <C> <C> <C> <C> Sales $ 30,237 $ 52,101 $ 79,092 $ 62,590 $ 224,020 Operating income (loss) 3,523 14,753 (18,226) (28,598) (28,548) Income (loss) before taxes 1,300 12,347 (23,575) (34,402) (44,330) Net income (loss) 1,294 12,315 (18,213) (24,946) (29,550) Limited Partner interest in net income (loss) 1,268 12,069 (17,849) (24,451) (28,963) Net income (loss) per Limited Partner Unit Basic and Diluted/(a)/ $ 0.20 $ 1.75 $ (1.11) $ (1.47) $ (2.53) </TABLE> (a) The sum of the quarters do not add-up to the total due to the weighting of Limited Partner Units outstanding. F-30
Schedule II Star Gas Partners, L.P. VALUATION AND QUALIFYING ACCOUNTS Years Ended September 30, 1999, 2000 and 2001 (in thousands) <TABLE> <CAPTION> Additions ------------------------------------ Balance at Beginning of Charged to Other Changes Balance at Year Description Year Costs & Expenses Add(Deduct) End of Year ---- ----------- ---- ---------------- ----------- ----------- <S> <C> <C> <C> <C> <C> $ 1,437/(b)/ 1999 Allowance for doubtful accounts $ 252 $ 371 (1,112)/(a)/ $ 948 ======= ======= ======= ======= $ 5,330/(c)/ 2000 Allowance for doubtful accounts $ 948 $ 2,669 (6,991)/(a)/ $ 1,956 ======= ======= ======= ======= $ 2,203/(d)/ 2001 Allowance for doubtful accounts $ 1,956 $10,624 $(3,419)/(a)/ $11,364 ======= ======= ======= ======= </TABLE> (a) Bad debts written off (net of recoveries). (b) Amount acquired as part of the Petro acquisition. (c) Amount acquired as part of the TG&E acquisition. (d) Amount acquired as part of the Meenan and Midwest Bottle Gas acquisitions. F-31