UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 ------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to _________ Commission File Number: 33-98490 -------- STAR GAS PARTNERS, L.P. ----------------------- (Exact name of registrant as specified in its charter) Delaware 06-1437793 - ------------------------------- ------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2187 Atlantic Street, Stamford, Connecticut 06902 ------------------------------------------------------- (Address of principal executive office) (203) 328-7300 ------------------------------------------------------- (Registrant's telephone number, including area code) ------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- -------- Indicate the number of shares outstanding of each issuer's classes of common stock, as of August 3, 2001: 19,724,967 Common Units 2,708,946 Senior Subordinated Units 345,364 Junior Subordinated Units 325,729 General Partner Units
STAR GAS PARTNERS, L.P. AND SUBSIDIARIES INDEX TO FORM 10-Q <TABLE> <CAPTION> PAGE -------- <S> <C> PART I Financial Information Item 1 - Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets as of September 30, 2000 and June 30, 2001 3 Condensed Consolidated Statements of Operations for the Three months ended June 30, 2000 and June 30, 2001 and for the Nine months ended June 30, 2000 and June 30, 2001 4 Condensed Consolidated Statements of Comprehensive Income for the Three months ended June 30, 2000 and June 30, 2001 and for the Nine months ended June 30, 2000 and June 30, 2001 5 Condensed Consolidated Statement of Partners' Capital for the nine months ended June 30, 2001 6 Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2000 and June 30, 2001 7 Notes to Condensed Consolidated Financial Statements 8-16 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 17-24 Item 3 - Quantitative and Qualitative Disclosures About Market Risk 25 PART II Other Information: Item 5 - Other Information 25 Item 6 - Exhibits and Reports on Form 8-K 25 Signature 26 </TABLE> 2
STAR GAS PARTNERS, L.P. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) <TABLE> June 30, September 30, 2001 2000 (unaudited) -------------- ------------- <S> <C> <C> Assets Current assets: Cash and cash equivalents $ 10,910 $ 9,390 Receivables, net of allowance of $1,956 and $5,443 respectively 66,858 116,354 Inventories 34,407 28,237 Prepaid expenses and other current assets 14,815 19,773 -------- -------- Total current assets 126,990 173,754 -------- -------- Property and equipment, net 171,300 205,934 Long-term portion of accounts receivable 7,282 6,950 Intangibles and other assets, net 313,404 340,547 -------- -------- Total assets $618,976 $727,185 ======== ======== LIABILITIES AND PARTNERS' CAPITAL Current liabilities: Accounts payable $ 27,874 $ 25,854 Working capital facility borrowings 24,400 17,210 Current maturities of long-term debt 16,515 18,037 Accrued expenses 42,410 48,755 Unearned service contract revenue 15,654 16,303 Customer credit balances 37,943 21,272 -------- -------- Total current liabilities 164,796 147,431 -------- -------- Long-term debt 310,414 363,374 Other long-term liabilities 4,588 5,015 Partners' Capital: Common unitholders 134,672 203,604 Subordinated unitholders 6,090 10,947 General partner (1,584) (1,213) Accumulated other comprehensive income - (1,973) -------- -------- Total Partners' Capital 139,178 211,365 -------- -------- Total Liabilities and Partners' Capital $618,976 $727,185 ======== ======== </TABLE> See accompanying notes to condensed consolidated financial statements. 3
STAR GAS PARTNERS, L.P. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) <TABLE> <CAPTION> Three Months Ended June 30, Nine Months Ended June 30, ----------------------------- -------------------------- (in thousands, except per unit data) 2000 2001 2000 2001 ------------- ----------- -------------- --------- <S> <C> <C> <C> <C> Sales: Product $104,243 $134,089 $562,795 $864,403 Installation, service and appliances 25,920 31,963 75,949 95,600 -------- -------- -------- -------- Total sales 130,163 166,052 638,744 960,003 Costs and expenses: Cost of product 66,204 88,711 328,038 564,626 Cost of installation, service and appliances 28,552 34,558 88,886 107,915 Delivery and branch 35,410 46,923 120,987 155,528 Depreciation and amortization 8,847 11,031 25,447 31,050 General and administrative 5,073 7,140 14,349 21,270 TG&E customer acquisition expense 932 525 932 1,896 Unit compensation expense 599 772 599 1,991 Net gain (loss) on sales of assets 6 (21) 56 21 -------- -------- -------- -------- Operating income (loss) (15,448) (23,629) 59,562 75,748 Interest expense, net 6,608 7,887 19,981 25,007 Amortization of debt issuance costs 141 161 398 457 -------- -------- -------- -------- Income (loss) before income taxes, minority interest and cumulative effect of change in accounting principle (22,197) (31,677) 39,183 50,284 Minority interest in net loss of TG&E 251 - 251 - Income tax expense 45 114 373 1,753 -------- -------- -------- -------- Income (loss) before cumulative change in accounting principle (21,991) (31,791) 39,061 48,531 Cumulative effect of change in accounting principle for adoption of SFAS No. 133, net of income taxes - - - 1,466 -------- -------- -------- -------- Net income (loss) $(21,991) $(31,791) $ 39,061 $ 49,997 ======== ======== ======== ======== General Partner's interest in net income (loss) $ (374) $ (449) $ 691 $ 745 -------- -------- -------- -------- Limited Partners' interest in net income (loss) $(21,617) $(31,342) $ 38,370 $ 49,252 ======== ======== ======== ======== Net income (loss) per Limited Partner unit: Basic $(1.15) $(1.38) $2.13 $2.28 ======== ======== ======== ======== Diluted $(1.15) $(1.38) $2.13 $2.27 ======== ======== ======== ======== Weighted average number of Limited Partner units outstanding: Basic 18,872 22,767 18,056 21,603 ======== ======== ======== ======== Diluted 18,872 22,767 18,056 21,716 ======== ======== ======== ======== </TABLE> See accompanying notes to condensed consolidated financial statements. 4
STAR GAS PARTNERS, L.P. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) <TABLE> <CAPTION> Three Months Ended June 30, Nine Months Ended June 30, ----------------------------- --------------------------- (in thousands) 2000 2001 2000 2001 ------------ ----------- --------- --------- <S> <C> <C> <C> <C> Net income (loss) $(21,991) $(31,791) $39,061 $ 49,997 Other comprehensive income (loss) Unrealized loss on derivative instruments - (1,975) - (10,083) ------------ -------- ------------ -------- Comprehensive income (loss) $(21,991) $(33,766) $39,061 $ 39,914 ============ ======== ============ ======== Reconciliation of Accumulated Other Comprehensive Income Balance, beginning of period $ - $ 159 $ - $ - Cumulative effect of the adoption of SFAS No. 133 - - - 10,544 Current period reclassification to earnings - (157) - (2,434) Current period other comprehensive loss - (1,975) - (10,083) ------------ -------- ------------ -------- Balance, end of period $ - $ (1,973) $ - $ (1,973) ============ ======== ============ ======== </TABLE> See accompanying notes to condensed consolidated financial statements. 5
STAR GAS PARTNERS, L.P. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL (UNAUDITED) (in thousands) <TABLE> <CAPTION> Number of Units Other ---------------------------------- Compre- Total Senior Junior General Senior Junior General hensive Partners' Common Sub. Sub. Partner Common Sub. Sub. Partner Income Capital ------ ------ ------ ------- ---------- -------- ------- --------- --------- ---------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Balance as of September 30, 2000 16,045 2,587 345 326 $134,672 $ 6,125 $ (35) $(1,584) $ - $139,178 Issuance of Common Units 3,680 59,314 59,314 Issuance of Senior Subordinated Units 110 2,160 2,160 Net income 42,378 6,088 786 745 49,997 Other comprehensive Income (1,973) (1,973) Net change Distributions: ($1.725 per common unit) (32,760) (32,760) ($1.400 per senior subordinated unit) (3,779) (3,779) ($1.150 per junior subordinated unit) (398) (398) ($1.150 per general partner unit) (374) (374) ------ ----- --- --- -------- ------- ----- ------- ------- -------- Balance as of June 30, 2001 19,725 2,697 345 326 $203,604 $10,594 $ 353 $(1,213) $(1,973) $211,365 ====== ===== === === ======== ======= ===== ======= ======= ======== </TABLE> See accompanying notes to condensed consolidated financial statements. 6
STAR GAS PARTNERS, L.P. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> Nine Months Ended June 30, ----------------------- (in thousands) 2000 2001 -------- --------- <S> <C> <C> CASH FLOWS PROVIDED BY OPERATING ACTIVITIES: Net income $ 39,061 $ 49,997 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 25,447 31,050 Amortization of debt issuance cost 398 457 Minority interest in net loss of TG&E (251) - Unit compensation expense 599 1,991 Provision for losses on accounts receivable 1,425 6,998 Gain on sales of assets (56) (21) Cumulative effect of change in accounting principle for the adoption of SFAS No. 133 - (1,466) Other (11) (7) Changes in operating assets and liabilities: Increase in receivables (33,700) (52,428) Decrease in inventories 8,580 8,348 Increase in other assets (946) (1,711) Decrease in accounts payable (2,802) (2,076) Decrease in other current and long-term liabilities (23,177) (13,217) -------- --------- Net cash provided by operating activities 14,567 27,915 -------- --------- CASH FLOWS USED IN INVESTING ACTIVITIES: Capital expenditures (4,634) (12,291) Proceeds from sales of fixed assets 360 368 Cash acquired in acquisitions 876 - Acquisitions (49,162) (85,084) -------- --------- Net cash used in investing activities (52,560) (97,007) -------- --------- CASH FLOWS PROVIDED BY FINANCING ACTIVITIES: Working capital facility borrowings 75,000 122,850 Working capital facility repayments (69,352) (130,040) Acquisition facility borrowings 49,350 68,700 Acquisition facility repayments (36,000) (79,600) Proceeds from issuance of debt 28,029 72,585 Repayment of debt (1,239) (7,203) Increase in deferred charges (551) (837) Proceeds from issuance of Common Units, net 22,611 59,314 Distributions (25,746) (37,311) Other (952) (886) -------- --------- Net cash provided by financing activities 41,150 67,572 -------- --------- Net increase (decrease) in cash 3,157 (1,520) Cash at beginning of period 4,492 10,910 -------- --------- Cash at end of period $ 7,649 $ 9,390 ======== ========= </TABLE> See accompanying notes to condensed consolidated statements. 7
STAR GAS PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1) PARTNERSHIP ORGANIZATION Star Gas Partners, L.P. ("Star Gas Partners" or the "Partnership") is a diversified home energy distributor and services provider, specializing in heating oil, propane, natural gas and electricity. Star Gas Partners is a Master Limited Partnership that at June 30, 2001 had 19.7 million common limited partner units (trading symbol "SGU" representing a 85.4% limited partner interests in Star Gas Partners) and 2.7 million senior subordinated units (trading symbol "SGH" representing an 11.7% limited partnership interest in Star Gas Partners) which are traded on the New York Stock Exchange. Additional interest in Star Gas Partners are represented by 0.3 million junior subordinated units (representing a 1.5% limited partner interest in Star Gas Partners) and 0.3 million general partner units (representing a 1.4% general partner interest in Star Gas Partners). Operationally the Partnership is organized as follows: . Petro Holdings, Inc. ("Petro" or the "heating oil segment"), is the nation's largest retail distributor of home heating oil and serves approximately 385,000 customers in the Northeast and Mid-Atlantic. Petro is an indirect wholly owned subsidiary of Star Gas Propane, L.P. . Star Gas Propane, L.P., ("Star Gas Propane" or the "propane segment") is a wholly owned subsidiary of Star Gas Partners. Star Gas Propane markets and distributes propane gas and related products to more than 260,000 customers in the Midwest, Northeast, Florida and Georgia. . Total Gas and Electric ("TG&E" or the "natural gas and electric reseller segment") is an energy reseller that markets natural gas and electricity to residential homeowners in deregulated energy markets in the Northeast and Mid-Atlantic states of New York, New Jersey, Pennsylvania, Maryland and Florida. As of June 30, 2001, TG&E served approximately 70,000 residential customers, which customer base has since decreased to 55,000 residential customers due to a turnback of 15,000 electric customers to the utilities for economic reasons. TG&E is a 72.7% owned subsidiary of Star Gas Partners. 2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The Consolidated Financial Statements for the period October 1, 1999 through April 6, 2000 include the accounts of Star Gas Partners, L.P., and subsidiaries, principally Petro and Star Gas Propane. Beginning April 7, 2000, the Consolidated Financial Statements also include the accounts and results of operations of TG&E and reflect the amounts related to the 27.3% minority interest holders. The financial information included herein is unaudited; however, such information reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for the fair statement of financial condition and results for the interim periods. The results of operations for the three and nine month periods ended June 30, 2001 are not necessarily indicative of the results to be expected for the full year. Inventories Inventories are stated at the lower of cost or market and are computed on a first-in, first-out basis. At the dates indicated, the components of inventory were as follows: <TABLE> <CAPTION> September 30, June 30, 2000 2001 ------------- ---------- (in thousands) <S> <C> <C> Propane gas $ 6,323 $ 9,853 Propane appliances and equipment 2,313 3,583 Fuel oil 14,263 4,298 Fuel oil parts and equipment 7,374 8,694 Natural gas 4,134 1,809 ------- ------- $34,407 $28,237 ======= ======= </TABLE> 8
2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued) Accounting Changes In June 1998, the Financial Accounting Standards Board ("FASB") issued 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 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. For derivatives recognized as Fair Value Hedges, changes in fair value are recognized in the income statement and are offset by related changes in the fair value of the item hedged. 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. The Partnership periodically hedges a portion of its oil, propane and natural gas purchases through the use of futures, options, collars and swap agreements. The purpose of the hedges is to provide a measure of price stability in the volatile markets of oil, propane and natural gas and to manage its exposure to commodity price risk under certain existing sales commitments. The Partnership also has derivative 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. The Partnership adopted SFAS No. 133 on October 1, 2000, and records its derivatives at fair market value. As a result of adopting the Standard, 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 which were recorded as cumulative effect of a change in accounting principle. For the three and nine month periods ended June 30, 2001, the Partnership recorded a net decrease to other comprehensive income of $2.1 million and $12.5 million respectively, representing in part cash flow hedges reclassified into earnings totaling $0.2 million and $2.4 million for the three and nine month period ended March 31, 2001, respectively. The estimated net amount of existing unrealized losses currently within other comprehensive income are expected to be reclassified into earnings within the next twelve months. Impact of Recently Issued Accounting Standards 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 is required to adopt the provisions of Statement No. 141 effective July 1, 2001 and Statement No. 142 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. 9
2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued) 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 June 30, 2001, the Partnership had unamoritized goodwill in the amount of $186.1 million and unamortized identifiable intangible assets in the amount of $154.4, of which $150.1 will be subject to the transition provisions of SFAS No. 141 and No. 142. Amortization expense related to goodwill was $7.3 million and $5.8 million for the year ended September 30, 2000 and the nine-month period ended June 30, 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. 3) LONG-TERM DEBT On October 25, 2000, the heating oil division completed a refinancing of $40 million of indebtedness incurred under its bank acquisition facility through the issuance of senior notes. The senior notes bear an average interest rate of 8.96% per year, have an average life of five and three- quarter years and are guaranteed by Star Gas Partners. The first maturity date of the senior notes is November 1, 2004 with a final maturity date of November 1, 2010. On March 29, 2001, the propane division issued $29.5 million of senior notes to refinance $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 an average interest rate of 7.89% per year and have an average life of nine years. The senior notes require two equal prepayments of $2.5 million on April 1, 2006 and April 1, 2007. The first maturity date of these notes is April 1, 2008 with a final maturity date of April 1, 2011. In March 2001, the natural gas and electric reseller segment replaced its existing revolving credit facility with a new revolving credit facility comprised of a $15.4 million working capital facility and a $3.0 million acquisition facility. 10
3) LONG-TERM DEBT - (Continued) In June 2001, the heating oil division replaced its existing bank credit facilities with a new bank credit facility consisting of a $123.0 million working capital facility, a $50.0 million revolving credit facility for the financing of acquisitions and capital expenditures and a $20.0 million facility for the issuance of standby letters of credit. 4) SEGMENT REPORTING In accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", the Partnership has four reportable segments, a retail distributor of heating oil, a retail distributor of propane, a reseller 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. 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 nine markets in the Northeast, Mid-Atlantic states and Florida 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 electric and natural gas reselling segment was added beginning April 7, 2000. There were no inter- segment sales. 11
4) SEGMENT REPORTING - (Continued) <TABLE> <CAPTION> Three Months Ended --------------------------------------------------------- June 30, 2000 (unaudited) --------------------------------------------------------- Heating Oil Propane TG&E Partners Consol. -------- ------- ------- -------- -------- <S> <C> <C> <C> <C> <C> STATEMENTS OF OPERATIONS - ---------------------------- Sales: Product $ 72,049 $20,946 $11,248 $ - $104,243 Installation, service, and appliance 23,253 2,667 - - 25,920 -------- ------- ------- -------- -------- Total sales 95,302 23,613 11,248 - 130,163 Cost and expenses: Cost of product 45,442 10,595 10,167 - 66,204 Cost of installation, service, and appliances 27,806 746 - - 28,552 Delivery and branch 25,011 10,399 - - 35,410 Depreciation and amortization 5,704 2,983 160 - 8,847 General and administrative 2,166 1,586 743 578 5,073 TG&E customer acquisition expense - - 932 - 932 Unit compensation expense - - - 599 599 Net gain (loss) on sales of assets (6) 12 - - 6 -------- ------- ------- -------- -------- Operating loss (10,833) (2,684) (754) (1,177) (15,448) Interest expense (income), net 4,072 2,491 237 (192) 6,608 Amortization of debt issuance costs 91 50 - - 141 -------- ------- ------- -------- -------- Loss before income taxes and minority interest (14,996) (5,225) (991) (985) (22,197) Minority interest in net loss of TG&E - - 251 - 251 Income tax expense 25 17 3 - 45 -------- ------- ------- -------- -------- Net loss $(15,021) $(5,242) $ (743) $ (985) $(21,991) ======== ======= ======= ======== ======== Capital expenditures $ 740 $ 593 $ 7 $ - $ 1,340 ======== ======= ======= ======== ======== </TABLE> <TABLE> <CAPTION> Three Months Ended --------------------------------------------------------- June 30, 2001 (unaudited) --------------------------------------------------------- Heating Oil Propane TG&E Partners Consol. -------- ------- ------- -------- -------- <S> <C> <C> <C> <C> <C> STATEMENTS OF OPERATIONS - ---------------------------- Sales: Product $ 89,450 $28,202 $16,437 $ - $134,089 Installation, service, and appliance 27,747 4,216 - - 31,963 -------- ------- ------- ------- -------- Total sales 117,197 32,418 16,437 - 166,052 Cost and expenses: Cost of product 57,588 15,259 15,864 - 88,711 Cost of installation, service, and appliances 33,194 1,364 - - 34,558 Delivery and branch 30,785 13,552 2,586 - 46,923 Depreciation and amortization 7,017 3,720 292 2 11,031 General and administrative 2,426 1,954 1,257 1,503 7,140 TG&E customer acquisition expense - - 525 - 525 Unit compensation expense - - - 772 772 Net gain (loss) on sales of assets (13) (8) - - (21) -------- ------- ------- ------- -------- Operating loss (13,826) (3,439) (4,087) (2,277) (23,629) Interest expense (income), net 4,540 3,041 780 (474) 7,887 Amortization of debt issuance costs 98 63 - - 161 -------- ------- ------- ------- -------- Loss before income taxes and minority interest (18,464) (6,543) (4,867) (1,803) (31,677) Minority interest in net loss of TG&E - - - - - Income tax expense 25 89 - - 114 -------- ------- ------- ------- -------- Net loss $(18,489) $(6,632) $(4,867) $(1,803) $(31,791) -------- ------- ------- ------- -------- Capital expenditures $ 3,598 $ 1,381 $ 247 $ - $ 5,226 ======== ======= ======= ======= ======== </TABLE> 12
4) SEGMENT REPORTING - (Continued) <TABLE> <CAPTION> Nine Months Ended ---------------------------------------------------------------------- June 30, 2000 (unaudited) ----------------------------------------------------------------------- Heating Oil Propane TG&E Partners Consol. -------- -------- ------- -------- -------- <S> <C> <C> <C> <C> <C> STATEMENTS OF OPERATIONS Sales: Product $436,791 $114,756 $11,248 $ - $562,795 Installation, service, and appliance 66,479 9,470 - - 75,949 -------- -------- ------- ------- -------- Total sales 503,270 124,226 11,248 - 638,744 Costs and expenses: Cost of product 259,322 58,549 10,167 - 328,038 Cost of installation, service, and appliances 85,879 3,007 - - 88,886 Delivery and branch 87,406 33,581 - - 120,987 Depreciation and amortization 16,369 8,918 160 - 25,447 General and administrative 7,169 4,611 743 1,826 14,349 TG&E customer acquisition expense - - 932 - 932 Unit compensation expense - - - 599 599 Net gain (loss) on sales of assets 8 48 - - 56 -------- -------- ------- ------- -------- Operating income (loss) 47,133 15,608 (754) (2,425) 59,562 Interest expense (income), net 12,982 6,964 237 (202) 19,981 Amortization of debt issuance costs 258 140 - - 398 -------- -------- ------- ------- -------- Income (loss) before income taxes and minority interest 33,893 8,504 (991) (2,223) 39,183 Minority interest in net loss of TG&E - - 251 - 251 Income tax expense 300 70 3 - 373 -------- -------- ------- ------- -------- Income (loss) before cumulative effect of adoption of accounting principle 33,593 8,434 (743) (2,223) 39,061 Cumulative effect of adoption of accounting principle - - - - - -------- -------- ------- ------- -------- Net income (loss) $ 33,593 $ 8,434 $ (743) $(2,223) $ 39,061 ======== ======== ======= ======= ======== Capital expenditures $ 1,752 $ 2,875 $ 7 $ - $ 4,634 ======== ======== ======= ======= ======== <CAPTION> Nine Months Ended ---------------------------------------------------------------------- June 30, 2000 (unaudited) ----------------------------------------------------------------------- Heating Oil Propane TG&E Partners Consol. -------- -------- ------- -------- -------- <S> <C> <C> <C> <C> <C> STATEMENTS OF OPERATIONS Sales: Product $601,356 $181,097 $81,950 $ - $864,403 Installation, service, and appliance 80,516 15,084 - - 95,600 -------- -------- ------- ------- -------- Total sales 681,872 196,181 81,950 - 960,003 Costs and expenses: Cost of product 386,188 104,278 74,160 - 564,626 Cost of installation, service, and appliances 102,876 5,039 - - 107,915 Delivery and branch 108,518 42,992 4,018 - 155,528 Depreciation and amortization 20,128 10,147 769 6 31,050 General and administrative 7,704 5,239 4,127 4,200 21,270 TG&E customer acquisition expense - - 1,896 - 1,896 Unit compensation expense - - - 1,991 1,991 Net gain (loss) on sales of assets (21) 42 - - 21 -------- -------- ------- ------- -------- Operating income (loss) 56,437 28,528 (3,020) (6,197) 75,748 Interest expense (income), net 15,451 8,734 2,111 (1,289) 25,007 Amortization of debt issuance costs 290 167 - - 457 -------- -------- ------- ------- -------- Income (loss) before income taxes and minority interest 40,696 19,627 (5,131) (4,908) 50,284 Minority interest in net loss of TG&E - - - - - Income tax expense 1,550 202 1 - 1,753 -------- -------- ------- ------- -------- Income (loss) before cumulative effect of adoption of accounting principle 39,146 19,425 (5,132) (4,908) 48,531 Cumulative effect of adoption of accounting principle 2,093 (229) (398) - 1,466 -------- -------- ------- ------- -------- Net income (loss) $ 41,239 $ 19,196 $(5,530) $(4,908) $ 49,997 ======== ======== ======= ======= ======== Capital expenditures $ 8,059 $ 3,916 $ 316 $ - $ 12,291 ======== ======== ======= ======= ======== </TABLE> 13
4) SEGMENT REPORTING - (Continued) <TABLE> <CAPTION> June 30, 2001 September 30, 2000 (unaudited) ------------------------------------------------------------------------------------------------------------- Heating (1) Heating (1) (in thousands) Oil Propane TG&E Partners Consol. Oil Propane TG&E Partners Consol. ------- ------- ---- -------- ------- ------- ------- ---- -------- ------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> BALANCE SHEETS - -------------- ASSETS Current assets: Cash and cash equivalents $ 6,288 $ 2,765 $ 222 $ 1,635 $ 10,910 $ 1,062 $ 5,762 $ 7 $ 2,559 $ 9,390 Receivables, net 51,475 9,976 5,407 - 66,858 81,737 13,453 21,164 - 116,354 Inventories 21,637 8,636 4,134 - 34,407 12,992 13,436 1,809 - 28,237 Prepaid expenses and other current asses 12,502 1,017 2,157 - 14,815 17,705 637 2,199 94 19,773 -------- -------- ------- -------- -------- -------- -------- ------- -------- -------- Total current assets 91,902 22,394 11,920 1,635 126,990 113,496 33,288 25,179 2,653 173,754 Property and equipment, net 39,026 132,008 266 - 171,300 45,582 159,835 517 - 205,934 Long-term portion of accounts receivable 7,282 - - - 7,282 6,950 - - - 6,950 Investment in subsidiaries - 69,309 - 143,036 - - 107,167 - 210,080 - Intangibles and other assets, net 236,069 63,003 14,174 158 313,404 253,437 73,639 13,249 222 340,547 -------- -------- ------- -------- -------- -------- -------- ------- -------- -------- Total assets $374,279 $286,714 $26,360 $144,829 $618,976 $419,465 $373,929 $38,945 $212,955 $727,185 ======== ======== ======= ======== ======== ======== ======== ======= ======== ======== <CAPTION> Heating (1) Heating (1) Oil Propane TG&E Partners Consol. Oil Propane TG&E Partners Consol. ------- ------- ---- -------- ------- ------- ------- ---- -------- ------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> LIABILITIES AND PARTNERS' CAPITAL Current Liabilities: Accounts payable $ 11,887 $ 7,436 $ 8,551 $ - $ 27,874 $ 12,197 $ 2,785 $10,872 $ - $ 25,854 Working capital facility borrowings 17,000 800 6,600 - 24,400 8,000 - 9,210 - 17,210 Current maturities of long- term debt 7,669 8,846 - - 16,515 13,181 4,856 - - 18,037 Accrued expenses and other current liabilities 36,882 4,006 1,521 - 42,410 35,161 9,204 2,829 1,561 48,755 Due to affiliate (1,115) (3,674) - 4,789 - 283 (860) 1,410 (833) - Unearned service contract revenue 15,654 - - - 15,654 16,303 - - - 16,303 Customer credit balances 26,101 9,805 2,037 - 37,943 9,835 9,574 1,863 - 21,272 -------- -------- ------- -------- -------- -------- -------- ------- -------- -------- Total current liabilities 114,078 27,219 18,709 4,789 164,796 94,960 25,559 26,184 728 147,431 Long-term debt 186,397 122,154 1,863 - 310,414 213,124 147,687 2,563 - 363,374 Other long-term liabilities 4,495 93 - - 4,588 4,214 761 40 - 5,015 Partners' Capital: Equity Capital 69,309 137,248 5,788 140,040 139,178 107,167 199,922 10,158 212,227 211,365 -------- -------- ------- -------- -------- -------- -------- ------- -------- -------- Total liabilities and Partners' Capital $374,279 $286,714 $26,360 $144,829 $618,976 $419,465 $373,929 $38,945 $212,955 $727,185 ======== ======== ======= ======== ======== ======== ======== ======= ======== ======== </TABLE> (1) The consolidated amounts include the necessary entries to eliminate the investment in Petro Holdings, Star Gas Propane and TG&E. 14
5) ACQUISITIONS During the nine-month period ending June 30, 2001, the Partnership acquired ten unaffiliated retail heating oil dealers and seven unaffiliated retail propane dealers. The aggregate consideration for these acquisitions accounted for by the purchase method of accounting was approximately $85.1 million. Purchase prices have been allocated to the acquired assets and liabilities based on their respective fair market values on the dates of acquisition. The purchase prices in excess of the fair values of net assets acquired were classified as intangibles in the Condensed Consolidated Balance Sheets. The following table indicates the allocation of the aggregate purchase price paid for these acquisitions and the respective periods of amortization assigned: <TABLE> <CAPTION> (in thousands) USEFUL LIVES ---------------------- <S> <C> <C> Land $ 2,098 - Buildings 1,757 30 years Furniture & fixtures 565 10 years Fleet 7,190 5 - 30 years Tanks and equipment 22,946 5 - 30 years Customer lists 28,771 7 - 15 years Restrictive covenants 3,942 5 years Goodwill 12,511 25 years Working capital 5,304 - ------- Total $85,084 ======= </TABLE> Sales and net income have been included in the Condensed Consolidated Statements of Operations from the respective dates of acquisition. The following pro forma information presents the results of operations for the nine months ending June 30, 2001 of the Partnership and the acquisitions previously described, as if the acquisitions had taken place on October 1, 2000. <TABLE> <CAPTION> (in thousands, except per share data) <S> <C> Sales $1,023,203 Net income $ 56,239 General Partner's interest in net income $ 838 Limited Partners' interest in net income $ 55,401 Basic net income per limited partner unit $ 2.56 Diluted net income per limited partner unit $ 2.55 </TABLE> 6) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION <TABLE> <CAPTION> (in thousands) Nine Months Ended June 30, -------------------------------- 2000 2001 ------- ------- <S> <C> <C> Cash paid during the period for: Income taxes $ 3,643 $ 796 Interest $27,490 $25,631 </TABLE> 15
7) EARNINGS PER LIMITED PARTNER UNIT <TABLE> <CAPTION> (in thousands, except per unit data) Three Months Ended Nine Months Ended June 30, June 30, ----------------------- ------------------- 2000 2001 2000 2001 -------- -------- ------- ------- <S> <C> <C> <C> <C> Income (loss) before cumulative effect of change in accounting principle per Limited Partner unit Basic $ (1.15) $ (1.38) $ 2.13 $ 2.21 Diluted $ (1.15) $ (1.38) $ 2.13 $ 2.20 Cumulative effect of change in accounting principle per Limited Partner unit Basic $ - $ - $ - $ 0.07 Diluted $ - $ - $ - $ 0.07 Net income (loss) per Limited Partner unit Basic $ (1.15) $ (1.38) $ 2.13 $ 2.28 Diluted $ (1.15) $ (1.38) $ 2.13 $ 2.27 Basic Earnings Per Unit: Net income (loss) $(21,991) $(31,791) $39,061 $49,997 Less: General Partner's interest in net income (loss) (374) (449) 691 745 -------- -------- ------- ------- Limited Partners' interest in net income (loss) $(21,617) $(31,342) $38,370 $49,252 ======== ======== ======= ======= Common Units 16,045 19,725 15,233 18,588 Senior Subordinated Units 2,482 2,697 2,478 2,670 Junior Subordinated Units 345 345 345 345 -------- -------- ------- ------- Weighted average number of Limited Partner units Outstanding 18,872 22,767 18,056 21,603 ======== ======== ======= ======= Basic earnings per unit $ (1.15) $ (1.38) $ 2.13 $ 2.28 ======== ======== ======= ======= Diluted Earnings Per Unit: Limited Partners' interest in net income (loss) $(21,617) $(31,342) $38,370 $49,252 ======== ======== ======= ======= Weighted average number of Limited Partner units outstanding 18,872 22,767 18,056 21,603 Senior subordinated units anticipated to be issued under employee incentive plan - - - 113 -------- -------- ------- ------- Diluted number of Limited Partner units 18,872 22,767 18,056 21,716 ======== ======== ======= ======= Diluted earnings per unit $ (1.15) $ (1.38) $ 2.13 $ 2.27 ======== ======== ======= ======= </TABLE> 8) SUBSEQUENT EVENTS In July 2001, the Partnership signed a contract to purchase the equity interests of Meenan Oil Co., Inc. ("Meenan"), believed to be the third largest home heating oil distributor in the United States, for a purchase price of approximately $120 million. Meenan has aggregate annual sales of approximately 129.4 million gallons of heating oil and serves approximately 110,000 home heating oil customers from eight branch locations in New York, New Jersey and Pennsylvania. All of these branches are either within or contiguous to the Partnership's existing area of operations for the heating oil division. This acquisition will be funded through the combination of the proceeds from a 3.2 million unit equity offering and a $103.0 million private placement of senior notes to institutional purchasers. The Partnership intends to use $63 million of the proceeds from the private placement to pay a portion of the purchase price for Meenan, $32 million to repay its indebtedness under the heating oil operation's bank acquisition facilities and the balance of the proceeds to repay other long-term heating oil indebtedness. The acquisition and related financings are expected to close simultaneously in mid-August. Cash Distributions - On August 1, 2001, the Partnership announced that it would pay a cash distribution of $0.575 per unit on all units for the three months ended June 30, 2001. The distribution will be paid on August 14, 2001, to unitholders of record on August 6, 2001. 16
STAR GAS PARTNERS, L.P. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Statement Regarding Forward-Looking Disclosure This Report includes "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act which represent the Partnership's expectations or beliefs concerning future events that involve risks and uncertainties, including those associated with the effect of weather conditions on the Partnership's financial performance, the price and supply of home heating oil, propane, electricity and natural gas and the ability of the Partnership to obtain new accounts and retain existing accounts. All statements other than statements of historical facts included in this Report including, without limitation, the statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere herein, are forward-looking statements. Although the Partnership believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the Partnership's expectations ("Cautionary Statements") are disclosed in this Report, including without limitation and in conjunction with the forward-looking statements included in this Report. All subsequent written and oral forward- looking statements attributable to the Partnership or persons acting on its behalf are expressly qualified in their entirety by the Cautionary Statements. Overview In analyzing the financial results of the Partnership, the following matters should be considered. The Total Gas and Electric (TG&E) acquisition was made on April 7, 2000. Accordingly, the results of operations for the nine month periods ended June 30, 2001 include TG&E's results for the entire period whereas the results for the previous corresponding nine month period only include TG&E's results of operations for only approximately one quarter. Since the TG&E acquisition was included for the most part in both periods, the results for the three month period ended June 30, 2001 are comparable to the three month period ended June 30, 2000. The primary use for 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 effect gross margins without necessarily impacting total sales. Also, the heating oil, propane and natural gas industries are seasonal in nature with peak activity occurring during the winter months. Accordingly, results of operations for the periods presented are not indicative of the results to be expected for a full year. The Partnership adopted SFAS No. 133 on October 1, 2000 and records its derivatives at fair market value. As a result of adopting the Standard, the Partnership's net income for the three and nine month periods ended June 30, 2001 were $2.2 million and $1.8 million less respectively, than what they would have been had the Standard not been adopted. The effect of the Standard will have no impact in how the Partnership will evaluate its ability to make the minimum quarterly distribution. 17
THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000 - -------------------------------------------- VOLUME For the three months ended June 30, 2001, retail volume of home heating oil and propane increased 10.8 million gallons, or 16.5%, to 76.1 million gallons, as compared to 65.4 million gallons for the three months ended June 30, 2000. This increase was due to an additional 8.9 million gallons provided by the heating oil segment and a 1.8 million gallon increase in the propane segment. Volume increased in the heating oil and propane segments largely due to the impact of additional volume provided by acquisitions. Temperatures in the Partnership's areas of operations were an average of 11.6% warmer than in the prior year's comparable quarter and approximately 12% warmer than normal. SALES For the three months ended June 30, 2001, sales increased $35.9 million, or 27.6%, to $166.1 million, as compared to $130.2 million for the three months ended June 30, 2000. This increase was due to an additional $21.9 million provided by the home heating oil segment, a $8.8 million increase in the propane segment and a $5.2 million increase in TG&E sales. Sales rose in all three segments largely due to increased volume sales and to a much 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 $4.5 million and by $1.5 million in the propane division due to an increased focus on the sales of rationally related products including heating, air conditioning and water softening equipment installation and service. COST OF PRODUCT For the three months ended June 30, 2001, cost of product increased $22.5 million, or 34.0%, to $88.7 million, as compared to $66.2 million for the three months ended June 30, 2000. This increase was due to an additional $12.1 million of cost of product at the home heating segment, $5.7 million of increased TG&E cost of product and a $4.7 million increase in the propane segment. The cost of product for all three segments increased due to the impact of higher volume sales and as a result of higher supply cost. While selling prices and supply cost increased on a per gallon basis the increase in selling prices was greater than the increase in supply costs, which resulted in an increase in per gallon margins. COST OF INSTALLATION, SERVICE AND APPLIANCES For the three months ended June 30, 2001, cost of installation, service and appliances increased $6.0 million, or 21.0%, to $34.6 million, as compared to $28.5 million for the three months ended June 30, 2000. This increase was due to an additional $5.4 million of expenses for the heating oil segment and a $0.6 million increase in cost for the propane segment. The cost of installation, service and appliances for both the heating oil and propane segments increased due to the additional sales of rationally related products and as a result of additional service cost for the larger base of business resulting primarily from acquisitions. 18
DELIVERY AND BRANCH EXPENSES For the three months ended June 30, 2001, delivery and branch expenses increased $11.5 million, or 32.5%, to $46.9 million, as compared to $35.4 million for the three months ended June 30, 2000. This increase was due to an additional $5.8 million of delivery and branch expenses at the heating oil segment, a $3.1 million increase in delivery and branch expenses for the propane segment and for a $2.6 million provision for bad debts expense at TG&E. 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 EXPENSES For the three months ended June 30, 2001, depreciation and amortization expenses increased $2.2 million, or 24.7%, to $11.0 million, as compared to $8.8 million for the three months ended June 30, 2000. This increase was primarily due to additional depreciation and amortization for heating oil and propane acquisitions and $0.1 million of increased depreciation and amortization expense for TG&E. GENERAL AND ADMINISTRATIVE EXPENSES For the three months ended June 30, 2001, general and administrative expenses increased $2.1 million, or 40.8%, to $7.1 million, as compared to $5.1 million for the three months ended June 30, 2000. The increase was due to $0.5 million of increased TG&E general and administrative expenses reflecting the expense for increased staffing levels and higher legal and professional fees, a $0.7 million increase in the heating oil and propane segments largely due to increased incentive compensation and acquisition related expenditures and a $0.9 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. TG&E CUSTOMER ACQUISITION EXPENSE For the three months ended June 30, 2001, TG&E customer acquisition expense decreased $0.4 million, or 43.7% to $0.5 million, as compared to $0.9 million for the three months ended June 30, 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 the three months ended June 30, 2001, unit compensation expense increased $0.2 million, or 28.9%, to $0.8 million, as compared to $0.6 million for the three months ended June 30, 2000. These expenses were incurred under the Partnership's Unit Incentive Plan whereby certain employees were granted senior subordinated units as an incentive for increased efforts during employment and as an inducement to remain in the service of the Partnership. INTEREST EXPENSE, NET For the three months ended June 30, 2001, net interest expense increased $1.3 million, or 19.4%, to $7.9 million, as compared to $6.6 million for the three months ended June 30, 2000. This increase was due to additional interest expense for higher working capital borrowings and for additional interest expense for the financing of propane and heating oil acquisitions. 19
NET LOSS For the three months ended June 30, 2001, net loss increased $9.8 million, or 44.6%, to $31.8 million, as compared to a net loss of $22.0 million for the three months ended June 30, 2000. The increase was due to $4.3 million of additional TG&E net loss, an additional $3.5 million of net loss at the heating oil segment and a $1.2 million increase in the net loss at the propane segment. Since the fiscal third quarter is a non-heating season period, acquisition activity would have the impact of further increasing the net loss for the quarter. Warmer weather and increased bad debt provisions also further negatively impacted the quarter. These segment losses were further increased by $0.8 million more of a net loss at the Partnership level, largely the result of the increase in unit compensation expense recorded at the Partnership level. 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 three months ended June 30, 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) decreased $6.2 million, or 122.2% to a loss of $11.3 million as compared to a loss of $5.1 million, for the three months ended June 30, 2000. This decrease was due to $1.7 million of less EBITDA generated by the heating oil segment, the $0.9 million of additional expenses at the Partnership level and a $3.8 million greater EBITDA loss at TG&E. The decrease in the heating oil segment was due to the impact of warmer weather and SFAS No. 133. The TG&E segment decrease was largely due to the $2.6 million provision for bad debt expense and for lower product margins experienced in this quarter. 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. The extent to which TG&E customer acquisition expense is not deducted in arriving at "EBITDA" is currently being reviewed by the Partnership. 20
NINE MONTHS ENDED JUNE 30, 2001 COMPARED TO NINE MONTHS ENDED JUNE 30, 2000 - ------------------------------------------- VOLUME For the nine months ended June 30, 2001, retail volume of home heating oil and propane increased 100.2 million gallons, or 24.4%, to 510.4 million gallons, as compared to 410.2 million gallons for the nine months ended June 30, 2000. This increase was due to an additional 75.5 million gallons provided by the heating oil segment and a 24.7 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. Temperatures in the Partnership's areas of operations were an average of 12.6% colder than in the prior year's comparable period and approximately 2% colder than normal. SALES For the nine months ended June 30, 2001, sales increased $321.3 million, or 50.3%, to $960.0 million, as compared to $638.7 million for the nine months ended June 30, 2000. This increase was attributable to $178.6 million provided by the home heating oil segment, a $72.0 million increase in the propane segment and by $70.7 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 $14.0 million and by $5.6 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 PRODUCT For the nine months ended June 30, 2001, cost of product increased $236.6 million, or 72.1%, to $564.6 million, as compared to $328.0 million for the nine months ended June 30, 2000. This increase was due to $126.9 million of additional cost of product at the home heating segment, $64.0 million of increased TG&E cost of product and a $45.7 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. 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, which resulted in an increase in per gallon margins. COST OF INSTALLATION, SERVICE AND APPLIANCES For the nine months ended June 30, 2001, cost of installation, service and appliances increased $19.0 million, or 21.4%, to $107.9 million, as compared to $88.9 million for the nine months ended June 30, 2000. This increase was due to $17.0 million of increased expenses for the heating oil segment and a $2.0 million increase in cost for the propane segment. The cost of installation, service and appliances for both the heating oil and propane segments increased due to the additional sales of rationally related products and as a result of additional service cost due to the colder temperatures. DELIVERY AND BRANCH EXPENSES For the nine months ended June 30, 2001, delivery and branch expenses increased $34.5 million, or 28.5%, to $155.5 million, as compared to $121.0 million for the nine months ended June 30, 2000. This increase was due to an additional $21.1 million of delivery and branch expenses at the heating oil segment, a $9.4 million increase in delivery and branch expenses for the propane segment and a $4.0 million increase at TG&E for a provision for bad debts expense. 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. 21
DEPRECIATION AND AMORTIZATION For the nine months ended June 30, 2001, depreciation and amortization expenses increased $5.6 million, or 22.0%, to $31.0 million, as compared to $25.4 million for the nine months ended June 30, 2000. This increase was primarily due to additional depreciation and amortization for heating oil and propane acquisitions and $0.6 million of increased depreciation and amortization expenses for TG&E. GENERAL AND ADMINISTRATIVE EXPENSES For the nine months ended June 30, 2001, general and administrative expenses increased $6.9 million, or 48.2%, to $21.3 million, as compared to $14.3 million for the nine months ended June 30, 2000. This increase was primarily due to $3.4 million of additional TG&E general and administrative expenses and a $2.3 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 $1.2 million in total for the heating oil and propane segments due to increased incentive compensation and for acquisition related expenditures. TG&E CUSTOMER ACQUISITION EXPENSE For the nine months ended June 30, 2001, TG&E customer acquisition expense increased $1.0 million, or 103.4%, to $1.9 million, as compared to $0.9 million for the nine months ended June 30, 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 the nine months ended June 30, 2001, unit compensation expense increased $1.4 million, or 232.4%, to $2.0 million, as compared to $0.6 million for the nine months ended June 30, 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. INTEREST EXPENSE, NET For the nine months ended June 30, 2001, net interest expense increased $5.0 million, or 25.2%, to $25.0 million, as compared to $20.0 million for the nine months ended June 30, 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 the nine months ended June 30, 2001, income tax expense increased $1.4 million, or 370.0%, to $1.8 million, as compared to $0.4 million for the nine months ended June 30, 2000. This increase was due to additional state income taxes for higher pretax earnings achieved for the nine months ended June 30, 2001. CUMULATIVE EFFECT OF ADOPTION OF ACCOUNTING PRINCIPLE For the nine months ended June 30, 2001, the Partnership recorded a $1.5 million increase in net income arising from the adoption of SFAS No. 133. NET INCOME For the nine months ended June 30, 2001, net income increased $10.9 million, or 28.0%, to $50.0 million, as compared to $39.1 million for the nine months ended June 30, 2000. The increase was due to a $10.9 million increase in net income at the propane segment and an additional $7.6 million of net income at the heating oil segment. The improvement in the net income for these segments was largely due to colder weather and as a result of acquisitions. Partially offsetting these increases in net income were $5.0 million of additional net loss for TG&E and $2.6 million of additional net loss at the Partnership level, largely the result of the increase in unit compensation expense recorded at the Partnership level. 22
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 nine months ended June 30, 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 $24.2 million, or 28.0%, to $110.7 million as compared to $86.5 million, for the nine months ended June 30, 2000. This increase was due to a $14.3 million increase in the propane segment EBITDA, $13.1 million of additional EBITDA generated by the heating oil segment partially offset by $2.4 million of additional expenses at the Partnership level and by $0.7 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. The extent to which TG&E customer acquisition expense is not deducted in arriving at "EBITDA" is currently being reviewed by the Partnership. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- During the nine months ended June 30, 2001, the Partnership sold 3.7 million common units (including 0.5 million of overallotment units exercised), the net proceeds of which, net of underwriter's discount, commission, and offering expenses was $59.3 million. These funds combined with net cash provided by $61.5 million in net working capital and acquisition facility borrowings, $27.9 million generated by operating activities, $72.6 million of long-term debt borrowings ($40.0 million of senior secured notes issued by the heating oil segment, $29.5 million of senior notes issued by the propane segment and $3.1 million of acquisition related notes) and $0.4 million in proceeds from the sale of fixed assets amounted to $221.7 million. Such funds were used for acquisitions of $85.1 million, distributions of $37.3 million, debt and acquisition facility repayment of $86.8 million, capital expenditures of $12.3 million and other financing activities of $1.7 million. As a result of the above activity, cash decreased by $1.5 million to $9.4 million. The $40.0 million of senior secured notes mentioned above were issued to three institutional lenders by the heating oil segment to complete a refinancing of $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 $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 the remainder of fiscal 2001, the Partnership anticipates paying interest of approximately $7.6 million and anticipates growth and maintenance capital additions of approximately $4.1 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 the next twelve months. 23
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS 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 is required to adopt the provisions of Statement No. 141 effective July 1, 2001 and Statement No. 142 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 June 30, 2001, the Partnership had unamoritized goodwill in the amount of $186.1 million and unamortized identifiable intangible assets in the amount of $154.4, of which $150.1 will be subject to the transition provisions of SFAS No. 141 and No. 142. Amortization expense related to goodwill was $7.3 million and $5.8 million for the year ended September 30, 2000 and the nine-month period ended June 30, 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 3. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Partnership is exposed to interest rate risk primarily through its bank credit facilities. The Partnership utilizes these borrowings to meet its working capital needs and also to fund the short-term needs of its acquisition program. At June 30, 2001, the Partnership had outstanding borrowings of approximately $49.2 million under its Bank Credit Facilities. In the event that interest rates associated with these facilities were to increase 100 basis points, the impact on future cash flows would be a decrease of approximately $0.5 million annually. The Partnership also selectively uses derivative financial instruments to manage its exposure to market risk related to changes in the current and future 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 product being hedged. Sensitivity analysis is a technique used to evaluate the impact of hypothetical market value changes. Based on a hypothetical ten percent increase in the cost of product at June 30, 2001, the potential gain on the Partnership's hedging activity would be to increase the fair market value of these outstanding derivatives by $7.3 million to a fair market value $10.2 million; and conversely a hypothetical ten percent decrease in the cost of product would decrease the fair market value of these outstanding derivatives by $7.3 million to a fair market value of ($4.4) million. PART II OTHER INFORMATION ------------------------- ITEM 5. OTHER INFORMATION Star's Partnership Agreement provides that 303,000 Senior Subordinated Units are to be distributed proportionally to holders of its Senior Subordinated (NYSE:SGH), Junior Subordinated and General Partner Units, at the end of any twelve month period in which its heating oil division has an Adjusted Operating Surplus in excess of $2.90 per unit. This will take place for a maximum of three non-overlapping twelve-month periods ending December 31, 2003. While Star's heating oil division generated an Adjusted Operating Surplus of $3.37 per unit, on an accrual basis, for the twelve months ended June 30, 2001, on a cash basis its Adjusted Operating Surplus for the period was below the $2.90 per unit necessary to distribute the 303,000 Senior Subordinated units referred to above. It is expected however, that the cash receipts and disbursements resulting from this past year's performance will result in those units being distributed after completion of the quarter ending September 30, 2001. While the Partnership currently believes this distribution will be undertaken at that time, there can be no guarantee of that future event. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS INCLUDED WITHIN: 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. 27.0 Financial Data Schedule (B) REPORTS ON FORM 8-K: 4/16/01 - Filing of Unitholders rights agreement adopted by the Partnership. 25
SIGNATURE --------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Partnership has duly caused this report to be signed on its behalf of the undersigned thereunto duly authorized: Star Gas Partners, L.P. By: Star Gas LLC (General Partner) <TABLE> <CAPTION> SIGNATURE Title Date ---------- ------- ------- <S> <C> <C> /s/ George Leibowitz Chief Financial Officer August 13, 2001 - ----------------------------- Star Gas LLC George Leibowitz (Principal Financial Officer) /s/ James J. Bottiglieri Vice President August 13, 2001 - ------------------------------ Star Gas LLC James J. Bottiglieri </TABLE> 26