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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
Date of report (Date of earliest event reported) December 14, 2004
STAR GAS PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
Delaware 33-98490 06-1437793
(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification No.)
2187 Atlantic Street, Stamford, CT 06902
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (203) 328-7300
--------------
Not Applicable
----------------------------------------------------------------
(Former name or former address, if changed since last report.)
================================================================================
ITEM 2.02. RESULTS OF OPERATIONS AND FINANCIAL CONDITION
On December 14, 2004, Star Gas Partners, L.P., a Delaware partnership (the
"Partnership"), issued a press release announcing its financial results for its
fiscal fourth quarter and full year ending September 30, 2004. A copy of the
press release is furnished within this report as Exhibit 99.1.
The information in this report is being furnished, and is not deemed as "filed"
for purposes of Section 18 of the Securities Exchange Act of 1934, as amended,
and shall not be deemed incorporated by reference in any filings under the
Securities Act of 1933, as amended, unless specifically stated so therein.
ITEM 7.01. REGULATION FD DISCLOSURE
ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS
Exhibit 99.1 A copy of the Star Gas Partners, L P. Press Release dated December
14, 2004
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
STAR GAS PARTNERS, L.P.
By: Star Gas LLC (General Partner)
By: /s/ Ami Trauber
----------------------------------------
Name: Ami Trauber
Title: Chief Financial Officer
Principal Financial & Accounting Officer
Date: December 14, 2004
Exhibit 99.1
Star Gas Partners, L.P. Announces Fiscal 2004 Results of Operations
STAMFORD, Conn.--(BUSINESS WIRE)--Dec. 14, 2004--Star Gas Partners, L.P.
(the "Partnership" or "Star") (NYSE:SGU)(NYSE:SGH), a diversified home energy
distributor and services provider specializing in heating oil and propane, today
announced its results of operations for the fiscal year and fourth quarter ended
September 30, 2004.
In analyzing the Partnership's financial results, the following matters
should be considered.
The Partnership's fiscal year ends on September 30. All references to
quarters and years respectively in this document are to fiscal quarters and
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 and
heating oil 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. The
Partnership typically has negative working capital at the end of each fiscal
year due to seasonality. In addition, sales volume typically fluctuates from
year to year in response to variations in weather, wholesale energy prices and
other factors. Gross profit is not only affected by weather patterns but also by
changes in customer mix. For example, sales to residential customers ordinarily
generate higher margins than sales to other customer groups, such as commercial
or agricultural customers. In addition, gross profit margins vary by geographic
region. Accordingly, gross profit margins could vary significantly from year to
year in a period of identical sales volumes.
As discussed below under the heading "Cost of Product," when heating oil
wholesale costs increased, the heating oil segment's retail sales prices did not
increase as rapidly as the increase in heating oil prices, which resulted in
lower per gallon margins. In general, the timing of cost pass-throughs can
significantly affect margins.
As of September 30, 2004, the wholesale cost of home heating oil, as
measured by the closing price of the New York Mercantile Exchange had increased
by 38% to $1.39 from $1.01 on June 30, 2004. This represents a 78% increase over
the heating oil price per gallon of $0.78 on September 30, 2003. Per gallon
heating oil prices subsequently increased to a high of $1.59 per gallon on
October 22, 2004, before retreating to $1.23 per gallon as of December 10, 2004.
The unprecedented rise in the wholesale price of heating oil has adversely
impacted the heating oil segment's margins and added to the heating oil
segment's difficulties in both attracting new and retaining existing customers.
The heating oil segment believes its rate of customer loss has risen not only
because of the greater than normal price competition resulting from the rise in
oil prices but also because of operational problems in the heating oil segment
and management's decision to upgrade the credit quality of its customer base.
Prior to the 2004 winter heating season, the heating oil segment attempted to
develop a competitive advantage in customer service and, as part of that effort,
centralized the heating equipment service and oil dispatch functions and engaged
a centralized call center to fulfill its telephone requirements. The
implementation of this initiative is taking longer and incurring greater
difficulties than the heating oil segment had anticipated, which adversely
impacted the customer base. As a result of the above, for fiscal 2004, the
heating oil segment experienced annual customer attrition of approximately 6.6%
excluding the impact of acquisitions. For fiscal 2003, before the increase in
the price of home heating oil and the full implementation of the business
process improvement program, the rate of customer loss was approximately 1.3%.
While the Partnership believes that the heating oil segment has made
progress in correcting the early inefficiencies associated with its customer
service, and that it has improved its responsiveness to customer needs, the
Partnership expects that attrition will continue into the 2004-2005 winter
heating season and perhaps beyond. The Partnership notes that even to the extent
that attrition can be halted, the current reduced customer base will adversely
impact net income for fiscal 2005 and perhaps beyond.
The following is a discussion of the results of operations of the
Partnership and its subsidiaries, and should be read in conjunction with the
historical Financial and Operating Data and Notes thereto included elsewhere in
this Report. The Partnership completed the sale of its TG&E subsidiaries in
March 2004. The following discussion reflects the historical results for the
TG&E segment as discontinued operations. Also, on November 18, 2004, the
Partnership signed an agreement for the sale of its propane segment. Upon final
consummation of this transaction, the propane segment will be reflected as a
discontinued operation and the historical statements will be reclassified to
reflect this presentation.
Fiscal Year Ended September 30, 2004 (Fiscal 2004)
Compared to Fiscal Year Ended September 30, 2003 (Fiscal 2003)
Statements of Operations by Segment
- -----------------------------------
(in thousands) Years Ended September 30,
2003
Statements of Operations Partners
Heating Oil Propane & Others Consol.
----------- -------- -------- -----------
Sales:
Product $ 934,967 $255,946 - $1,190,913
Installations, service
and appliances 168,001 23,354 - 191,355
Total sales 1,102,968 279,300 - 1,382,268
Cost and expenses:
Cost of product 598,397 139,008 - 737,405
Cost of installations,
service and appliances 195,146 6,007 - 201,153
Delivery and branch
expenses 217,244 76,279 - 293,523
Depreciation &
amortization expenses 35,535 16,958 - 52,493
General and
administrative expenses 22,356 10,568 17,407 50,331
Operating income (loss) 34,290 30,480 (17,407) 47,363
Net interest expense 22,760 11,037 6,770 40,567
Amortization of debt
issuance costs 1,655 194 383 2,232
(Gain) loss on redemption
of debt (212) 393 - 181
Income (loss) from
continuing operations
before income taxes 10,087 18,856 (24,560) 4,383
Income tax expense 1,200 300 - 1,500
Income (loss) from
continuing operations 8,887 18,556 (24,560) 2,883
Income from discontinued
operations before
cumulative effect of
change in accounting
principle - - 1,230 1,230
Loss on sale of TG&E
segment, net of taxes - - - -
Cumulative effect of
change in accounting
principal - adoption of
SFAS 142 - - (3,901) (3,901)
Net income (loss) $ 8,887 $ 18,556 $(27,231)$ 212
(in thousands) Years Ended September 30,
2004
Statements of Operations Partners
Heating Oil Propane & Others Consol.
----------- -------- -------- -----------
Sales:
Product $ 921,443 $ 317,139 $ - $1,238,582
Installations, service
and appliances 183,648 31,707 - 215,355
Total sales 1,105,091 348,846 - 1,453,937
Cost and expenses:
Cost of product 594,153 185,725 - 779,878
Cost of installations,
service and appliances 204,902 11,273 - 216,175
Delivery and branch
expenses 232,985 92,701 - 325,686
Depreciation &
amortization expenses 37,313 20,030 - 57,343
General and
administrative expenses 16,535 10,092 3,402 30,029
Operating income (loss) 19,203 29,025 (3,402) 44,826
Net interest expense 28,038 10,321 7,544 45,903
Amortization of debt
issuance costs 2,750 166 730 3,646
(Gain) loss on redemption
of debt - - - -
Income (loss) from
continuing operations
before income taxes (11,585) 18,538 (11,676) (4,723)
Income tax expense 1,240 285 - 1,525
Income (loss) from
continuing operations (12,825) 18,253 (11,676) (6,248)
Income from discontinued
operations before
cumulative effect of
change in accounting
principle - - 923 923
Loss on sale of TG&E
segment, net of taxes - - (538) (538)
Cumulative effect of
change in accounting
principal - adoption of
SFAS 142 - - - -
Net income (loss) $ (12,825)$ 18,253 $(11,291)$ (5,863)
Volume
For fiscal 2004, retail volume of home heating oil and propane increased
12.6 million gallons, or 1.7%, to 754.7 million gallons, as compared to 742.1
million gallons for fiscal 2003. An analysis by segment is found below:
(in millions of gallons)
Heating Oil Segment Propane Segment Total
------------------- ---------------- -------
Volume - Fiscal 2003 567.0 175.1 742.1
Impact of warmer
temperatures (43.9) (10.4) (54.3)
Impact of acquisitions 36.1 44.3 80.4
Net customer attrition (18.2) (6.5) (24.7)
Other 10.6 0.6 11.2
------------------- ---------------- -------
Change (15.4) 28.0 12.6
------------------- ---------------- -------
Volume - Fiscal 2004 551.6 203.1 754.7
=================== ================ =======
Retail volume sold in the heating oil segment declined by 15.4 million
gallons, or 2.7%, to 551.6 million gallons for fiscal 2004, as compared to 567.0
million gallons for fiscal 2003. We believe that this 15.4 million gallon
decline at the heating oil segment was due to the impact of warmer temperatures
and net customer attrition partially offset by acquisitions and other volume
changes. Net customer attrition is the difference between gross customer losses
and customers added through internal marketing efforts. Customers added through
acquisitions do not impact the calculation of net attrition. Temperatures in the
heating oil segment's geographic areas of operations were 7.7% warmer in fiscal
2004 than in fiscal 2003 and approximately 0.2% warmer than normal as reported
by the National Oceanic Atmospheric Administration ("NOAA").
At September 30, 2004, after adjusting for acquisitions, the heating oil
segment estimates that it had approximately 6.6% fewer home heating oil
customers than as of September 30, 2003. For the quarter ended September 30,
2004, the heating oil segment (excluding acquisitions) lost approximately 11,000
customers (net) as compared to the quarter ended September 30, 2003, in which
the heating oil segment lost approximately 1,000 customers (net). We believe
that net customer attrition is the result of various factors including but not
limited to price, service and credit. The continued rise in the price of heating
oil, especially during the fourth quarter of fiscal 2004, added to the heating
oil segment's difficulties in reducing customer attrition. The Partnership
believes that the unprecedented rise in heating oil prices has increased the
competitive pressures facing its heating oil segment. As wholesale prices have
risen, many of the Partnership's competitors have not raised their retail prices
to fully offset the wholesale price rise. In an effort to minimize the loss of
customers to price competition, the Partnership has also not increased its
prices to fully offset for the rise in wholesale prices, resulting in reduced
margins. Nevertheless, many of the Partnership's competitors appear to have
succeeded in inducing the Partnership's customers to leave through various
price-related strategies. The Partnership believes that going forward it may
need to be even more sensitive to price competition, resulting in the
possibility of further reductions in margins.
In addition, prior to the 2004 winter heating season, the heating oil
segment attempted to develop a competitive advantage in customer service and, as
part of that effort, centralized its heating equipment service dispatch and
engaged a centralized call center to respond to telephone inquiries. The
implementation of that initiative has taken longer than the heating oil segment
anticipated, impacting customer service. The Partnership believes that the
heating oil segment's rate of customer loss in fiscal 2004 was due to a
combination of higher energy prices, operational and customer service problems
together with the implementation of stricter customer credit requirements
towards the end of fiscal 2004.
For fiscal 2004, retail volume sold at the propane segment increased 28.0
million gallons, or 16.0%, to 203.1 millions gallons, as compared to 175.1
million gallons for fiscal 2003. This increase in volume reflects the additional
44.3 million gallons provided by acquisitions, partially offset by the impact of
warmer temperatures and customer attrition. Temperatures in the propane
segment's geographic areas of operations were 9.0% warmer in fiscal 2004 than in
fiscal 2003 and 4.4% warmer than normal as reported by NOAA. At September 30,
2004, after adjusting for acquisitions, the propane oil segment estimates that
it had approximately 2.7% fewer customers than at September 30, 2003. The
propane segment believes that the increase in the price of propane was the
primary reason for the net attrition in fiscal 2004. The Partnership believes
that greater than normal price competition resulting from many of the propane
segment's competitors, including farmers cooperatives in the Midwest, appear to
have succeeded in inducing the propane segment's customers to leave through
various price- related strategies.
Product Sales
For fiscal 2004, product sales increased $47.7 million, or 4.0%, to
$1,238.6 million, as compared to $1,190.9 million for fiscal 2003. At the
heating oil segment, product sales declined by $13.5 million, or 1.4%, to $921.4
million in fiscal 2004, as compared to $935.0 million in fiscal 2003. While
warmer temperatures and customer losses at the heating oil segment led to a
reduction in product sales, the decline was partially offset by an increase in
product sales attributable to acquisitions and higher selling prices. At the
propane segment, product sales increased by $61.2 million, or 23.9%, to $317.1
million, as compared to $255.9 million in fiscal 2003 largely due to higher
retail volume sold. This increase at the propane segment was primarily due to
the additional sales from acquisitions and higher selling prices, which offset
the impact of warmer weather and customer attrition. As experienced in the
heating oil segment, selling prices at the propane segment were higher in fiscal
2004 than in fiscal 2003 in response to higher wholesale propane supply costs.
Sales, Installation, Service and Appliances
For fiscal 2004, installation, service and appliance sales increased $24.0
million, or 12.5%, to $215.4 million as compared to $191.4 million for fiscal
2003. At the heating oil segment, installation, service and appliance sales
increased $15.6 million, or 9.3%, to $183.6 million for fiscal 2004, as compared
to $168.0 million for fiscal 2003 due to acquisitions and measures taken in the
last several years to increase service revenues. In the propane segment,
installation, service and appliance sales increased $8.4 million, or 35.8%, to
$31.7 million in fiscal 2004, as compared to $23.4 million in fiscal 2003
largely due to acquisitions. This large increase in the propane segment was
greater than in prior years due to the acquisition of Home Energy in the fourth
quarter of fiscal 2003, which accounted for $6.9 million of the increase in
installation, service and appliance sales.
Cost of Product
For fiscal 2004, cost of product increased $42.5 million, or 5.8%, to
$779.9 million, as compared to $737.4 million for fiscal 2003. In the heating
oil segment, cost of product declined by $4.2 million, or 0.7%, to $594.2
million in fiscal 2004, as compared to $598.4 million in fiscal 2003, as the
impact of net customer attrition and warmer temperatures exceeded wholesale cost
increases and the additional product requirement for acquisitions. In the
propane segment, cost of product increased $46.7 million, or 33.6%, to $185.7
million in fiscal 2004 as compared to $139.0 million in fiscal 2003. This
increase was due to acquisitions and an increase in wholesale supply costs,
which more than offset a reduction in cost of product due to warmer temperatures
and net customer attrition.
While selling prices and wholesale prices increased on a per gallon basis
at both segments, the increase in selling prices exceeded the increase in supply
costs during the first nine months of fiscal 2004. At September 30, 2004,
heating oil supply costs were approximately 38% higher than at June 30, 2004 and
propane supply costs were approximately 25% higher for the same period. During
the three months ended September 30, 2004, the segments were not able to fully
pass these increases on to their respective customers. As a result, per gallon
margins for the three months ended September 30, 2004 declined by 2.3 cents per
gallon at the heating oil segment and 2.9 cents per gallon at the propane
segment, as compared to the three months ended September 30, 2003, which
partially offset per gallon margin increases that the segments' experienced
earlier in the year. The per gallon margins realized in both segments for the
three months ended September 30, 2004 were significantly less than expectations.
For fiscal 2004, per gallon margin increases were realized in the base business
compared to fiscal 2003 (excluding the impact of acquisitions) of 0.8 cents per
gallon at the heating oil segment and 2.7 cents per gallon at the propane
segment.
Overall per gallon margins at the propane segment declined in fiscal 2004
as compared to fiscal 2003 due to the mix of volume attributable to
acquisitions. The Partnership continues to experience high wholesale supply
costs and believes that it will not be able to pass all these increases on to
its customers through retail sales prices. If wholesale supply costs remain
volatile and at historically high levels, per gallon profit margins and results
are likely to be adversely impacted. See "Recent Performance" below.
Cost of Installations, Service and Appliances
For fiscal 2004, costs of installations, service and appliances increased
$15.0 million, or 7.4%, to $216.2 million, as compared to $201.2 million for
fiscal 2003 representing a reduction in the loss historically associated with
installations, service and appliances. At the heating oil segment, cost of
installations, service and appliances increased $9.8 million, or 5.0%, to $204.9
million in fiscal 2004, as compared to $195.1 million in fiscal 2003. This
change was primarily due to acquisitions and wage and other cost increases.
In the propane segment, cost of installations, service and appliances
increased $5.3 million, or 87.7%, to $11.3 million in fiscal 2004, as compared
to $6.0 million in fiscal 2003 due to the previously noted acquisition of Home
Energy in the fourth fiscal quarter of 2003 whose full year impact is first
reflected in fiscal 2004.
Delivery and Branch Expenses
For fiscal 2004, delivery and branch expenses increased $32.2 million, or
11.0%, to $325.7 million in fiscal 2004, as compared to $293.5 million in fiscal
2003. At the heating oil segment, delivery and branch expenses increased $15.7
million, or 7.2%, to $233.0 million in fiscal 2004, as compared to $217.2
million in fiscal 2003. This increase in the heating oil segment of $15.7
million was due to a higher level of fixed and variable operating costs
attributable to acquisitions, (primarily those completed in eastern
Pennsylvania) of $10.1 million and approximately $6.3 million due to operating
and wage increases. These increases in delivery and branch expenses were
partially reduced by cost reductions relating to lower volume delivered due to
warmer temperatures and net customer attrition experienced in fiscal 2004. Prior
to the 2004 winter heating season, the heating oil segment attempted to develop
a competitive advantage in customer service, and as part of that effort
centralized its heating equipment service dispatch and engaged a centralized
call center to respond to telephone inquiries. Start-up challenges associated
with this initiative impacted the customer base and unanticipated training and
support was required. The expected savings from this initiative were less than
expected.
At the propane segment, delivery and branch expenses increased $16.4
million, or 21.5%, to $92.7 million as compared to $76.3 million for fiscal
2003. This increase of $16.4 million was due to additional operating costs
associated with acquisitions at the propane segment of $14.9 million (of which
$11.5 million is attributable to the Home Energy acquisition), and approximately
$2.2 million due to operating and wage increases. As in the heating oil segment,
the delivery and branch expense increases at the propane segment was partially
offset by cost reductions relating to lower volume attributable to warmer
weather and net customer losses.
Depreciation and Amortization
For fiscal 2004, depreciation and amortization expenses increased $4.9
million, or 9.2%, to $57.3 million, as compared to $52.5 million for fiscal
2003. This increase was primarily due to a larger depreciable base of assets, as
a result of the impact of recent acquisitions at both the heating oil and
propane segments and to increased depreciation resulting from the technology
investment made by the heating oil segment in centralizing its customer service
and dispatcher functions. Increases of $1.8 million and $3.1 million were
experienced at the heating oil and propane segments, respectively.
General and Administrative Expenses
For fiscal 2004, general and administrative expenses declined $20.3
million, or 40.3%, to $30.0 million, as compared to $50.3 million for fiscal
2003. At the Partnership level, general and administrative expenses declined by
$14.0 million from $17.4 million in fiscal 2003 to $3.4 million in fiscal 2004,
due to a $10.4 million reduction in the expense for compensation earned for unit
appreciation rights on the Partnership's senior subordinated units, a $2.5
million reduction in restricted stock awards and a reduction of $1.4 million in
bonus compensation expense. For fiscal 2004, Partnership level expenses totaled
$3.4 million, which included $2.5 million in salary expense and bonus, $4.9
million in legal and administrative costs, partially offset by a credit of $4.0
million for unit appreciation rights. For fiscal 2003, Partnership expenses
totaled $17.4 million, which included $3.4 million in salary and bonus expense,
$9.0 million in unit appreciation rights and restricted stock awards expense and
$5.0 million in legal and administrative costs. At the heating oil segment,
general and administrative expenses declined by $5.8 million, or 26.0%, to $16.5
million in fiscal 2004 from $22.4 million in fiscal 2003. This decline was due
to a reduction in certain expenses relating to the heating oil segment's
centralized customer service and dispatch project of $7.0 million. The reduction
in general and administrative expenses at the heating oil segment was partially
offset by $1.2 million in additional expenses due to severances paid and a
higher level of legal and professional expenses. At the propane segment, general
and administrative expenses declined $0.5 million, or 4.5%, to $10.1 million for
fiscal 2004, as compared to $10.6 million for fiscal 2003.
Operating Income (Loss)
For fiscal 2004, operating income decreased $2.5 million, or 5.4%, to $44.8
million, as compared to $47.4 million for fiscal 2003. At the Partnership level,
the operating loss decreased by $14.0 million from a $17.4 million loss in
fiscal 2003 to a $3.4 million loss in fiscal 2004 due to a $10.4 million
reduction in the accrual for compensation earned for unit appreciation rights on
Partnership's senior subordinated units, lower restricted stock awards of $2.5
million and lower bonus compensation expense of $1.4 million. At the heating oil
segment, operating income declined by $15.1 million, or 44.0%, to $19.2 million,
as compared to $34.3 million for fiscal 2003. This decline was due to warmer
temperatures of 7.7% in the heating oil segment's geographic areas of operations
in fiscal 2004 than in fiscal 2003, net customer attrition, operating and wage
increases and higher depreciation and amortization expense, which were reduced
in part by the operating income attributable to acquisitions, an increase in per
gallon gross profit margins of the base business, lower expenses associated with
the heating oil segment's centralized customer service and dispatch project and
increased service revenues. At the propane segment, operating income declined
$1.5 million, or 4.8%, to $29.0 million, as compared to $30.5 million for fiscal
2003. This decline was due to warmer temperatures of 9.0% in the propane
segment's geographic areas of operations in fiscal 2004 compared to fiscal 2003,
net customer attrition, operating and wage increases and higher depreciation and
amortization, reduced in part by operating income from acquisitions and higher
per gallon margins.
Interest Expense
For fiscal 2004, interest expense increased $4.9 million, or 11.1%, to
$49.4 million, as compared to $44.4 million for fiscal 2003. This increase was
due to higher principal amount of long-term debt outstanding and an increase in
the Partnership's weighted average interest rate during fiscal 2004, as compared
to fiscal 2003.
Amortization of Debt Issuance Costs
For fiscal 2004, amortization of debt issuance costs increased $1.4
million, or 63.4%, to $3.6 million, as compared to $2.2 million for fiscal 2003.
This increase was largely due to the amortization of debt issuance costs for the
Partnership's $265.0 million senior notes offerings and for the amortization of
bank fees incurred in connection with refinancing certain bank facilities.
Income Tax Expense
Income tax expense for fiscal 2004 was $1.5 million and represents certain
state income taxes. The amount recorded in fiscal 2004 was unchanged from fiscal
2003.
Income (Loss) From Continuing Operations
For fiscal 2004, income (loss) from continuing operations decreased $9.1
million, to a loss of $6.2 million, as compared to income of $2.9 million for
fiscal 2003. This decline was due to a $21.7 million decrease in income at the
heating oil segment and a decline in income at the propane segment of $0.3
million partially offset by $12.9 million in lower losses at the Partnership
level. Income (loss) from continuing operations declined as the effects of
warmer temperatures, other volume changes, including customer losses, operating
and wage increases and an increase in interest expense were partially offset by
the positive impacts of acquisitions, improved per gallon gross profit margins
on the base business and lower compensation expenses at the Partnership level of
$14.3 million in the form of unit appreciation rights, restricted stock awards
and bonus expense.
Income From Discontinued Operations
For fiscal 2004, income from discontinued operations decreased $0.3
million. This income relates to the operating results from the TG&E segment that
was sold on March 31, 2004.
Loss On Sale of TG&E Segment
For fiscal 2004, the Partnership recorded a $0.5 million loss on the sale
of TG&E.
Cumulative Effect of Change in Accounting Principle
For fiscal 2003, the Partnership recorded a $3.9 million charge arising
from the adoption of Statement No. 142 to reflect the impairment of its goodwill
for TG&E.
Net Income (loss)
For fiscal 2004, net income (loss) decreased $6.1 million, to a loss of
$5.9 million, as compared to $0.2 million in income for fiscal 2003. The change
was due to a $9.1 million decrease in income from continuing operations, a $0.3
million decrease in income from discontinued operations and the $0.5 million
loss on the sale of TG&E. Net income was also impacted by the adoption of SFAS
No. 142, which resulted in a charge of $3.9 million in fiscal 2003.
Earnings From Continuing Operations Before Interest, Taxes, Depreciation
and Amortization (EBITDA)
For the fiscal year ended September 30, 2004, EBITDA increased $2.5
million, or 2.5%, to $102.2 million as compared to $99.7 million for fiscal
2003. This increase was due to $2.0 million additional EBITDA generated by the
propane segment and $14.0 million additional EBITDA at the Partnership level
largely due to the reduction in the accrual for compensation earned for unit
appreciation rights, reduced by a decline in EBITDA at the heating oil segment
of $13.5 million. 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. EBITDA for the Partnership is calculated for
the fiscal years ended September 30 as follows:
Fiscal Year Ended September 30,
-------------------------------
(in thousands) 2003 2004
------------- -------------
Income (loss) from continuing operations $2,883 $(6,248)
Plus:
Income tax expense 1,500 1,525
Amortization of debt issuance costs 2,232 3,646
Interest expense, net 40,567 45,903
Depreciation and amortization 52,493 57,343
------------- -------------
EBITDA 99,675 102,169
Add/(subtract)
Loss of redemption of debt 181 -
Income tax expense (1,500) (1,525)
Interest expense, net (40,567) (45,903)
Unit compensation expense 2,606 86
Provision for losses on accounts
receivable 7,726 8,749
(Gain) on sales of fixed assets, net (156) (226)
Change in operating assets and
liabilities (17,370) 2,490
------------- -------------
Net cash used in operating
activities $50,595 $65,840
============= =============
RECENT PERFORMANCE
The following is a discussion of certain important factors that have had a
significant impact on the Partnership's recent performance.
Volume
For the three months ended September 30, 2004, retail volume of home
heating oil and propane decreased 0.7 million gallons, or 1.0%, to 68.5 million
gallons, as compared to 69.2 million gallons for the three months ended
September 30, 2003. Retail volume sold in the heating segment declined by 1.5
million gallons, or 3.6%, to 41.1 million gallons for the three months ended
September 30, 2004, as compared to 42.6 million gallons for the three months
ended September 30, 2003. The Partnership believes that this decline was due to
the impact of customer attrition throughout fiscal 2004. Based on the
preliminary data available to it, the Partnership believes that for the period
from October 1, 2004 to November 30, 2004, retail volume sold in the heating oil
segment declined by 5.5 million gallons, or 7.3%, to 70.0 million gallons, as
compared to 75.4 million gallons in the prior year's comparable period. This was
primarily due to the carryover impact of the 6.6% customer attrition from fiscal
2004. Temperatures in the heating oil segment's geographic areas of operations
for the period October 1, 2004 to November 30, 2004 were approximately similar
to the prior year's comparable period.
For the three months ended September 30, 2004, the heating oil segment lost
11,000 accounts (net) or approximately 2.2% of its customer base, as compared to
the three months ended September 30, 2003 in which the heating oil segment lost
1,000 accounts (net) or approximately 0.2% of its customer base. The Partnership
believes that net customer losses are a result of various factors including but
not limited to price, service and credit. The continuous rise in the price of
heating oil especially during the fourth quarter of fiscal 2004 added to the
heating oil segment's difficulties in reducing customer attrition. As of
September 30, 2004, the cost of home heating oil, as measured by the closing
price of the New York Mercantile Exchange, had increased by 38% to $1.39 from
$1.01 on June 30, 2004. Based on the preliminary data available to it, the
Partnership believes that for the period from October 1, 2004 to November 30,
2004, the heating oil segment lost approximately 1,000 accounts (net), versus
the two months ending November 30, 2003 in which the heating oil segment's net
customer loss was approximately 500 accounts (net). While the heating oil
segment believes its customer service has improved in October and November 2004
versus the comparable two months in the previous year, at this time, the heating
oil segment cannot estimate the net customer attrition rate for fiscal 2005.
However, even if the net customer attrition rate is reduced, the lower customer
base resulting from the fiscal 2004 customer attrition will continue to
adversely affect the Partnership during fiscal 2005 and perhaps beyond.
Retail volume sold in the propane segment increased by 0.8 million gallons,
or 3.1%, to 27.4 million gallons for the three months ended September 30, 2004,
as compared to 26.6 million gallons for the three months ended September 30,
2003. The Partnership believes that this 0.8 million gallon increase was due to
the additional volume provided from acquisitions, partially offset by the
carryover effect of 2.7% customer attrition in fiscal 2004. For the period from
October 1, 2004 to November 30, 2004, retail volume sold at the propane segment
declined by 5.1 million gallons, or 15.0%, to 28.7 million gallons, as compared
to 33.7 million gallons in the prior year's comparable period. The decline was
due to the carryover effect of customer attrition from fiscal 2004 and lower
agriculture volume, partially offset by the impact of acquisitions. Temperatures
for the propane segment's geographic areas of operations were approximately
similar in both periods.
For the three months ended September 30, 2004, the propane segment lost
3,400 accounts (net) or approximately 1.0% of its customer base, as compared to
the three months ended September 30, 2003 in which the propane segment lost
9,300 accounts (net) or approximately 3.1% of its customer base. Based on the
preliminary data available to us, the Partnership believes that for the period
from October 1, 2004 to November 30, 2004, the propane segment gained
approximately 2,900 accounts (net) as compared to the prior year's comparable
period in which the propane segment lost approximately 200 accounts (net). At
this time, the propane segment cannot estimate the net customer attrition rate
for fiscal 2005; however, even if the net customer attrition rate is reduced,
the lower customer base resulting from the fiscal 2004 customer attrition will
continue to adversely effect the Partnership through the date of the proposed
sale of the propane segment and, if the propane segment is not sold, through the
remainder of fiscal 2005 and perhaps beyond.
Cost of Product
As of September 30, 2004, the wholesale cost of home heating oil, as
measured by the closing price of the New York Mercantile Exchange had increased
by 38% to $1.39 from $1.01 on June 30, 2004. Per gallon heating oil prices
subsequently increased to a high of $1.59 per gallon on October 22, 2004, before
retreating to $1.23 per gallon as of December 10, 2004. As of September 30,
2004, the wholesale cost of propane, as reported by Oil Price Information
Service had increased 25% to $0.84 per gallon from $0.67 per gallon on June 30,
2004. The per gallon price of propane subsequently increased to a high of $0.97
on October 25, 2004 before retreating to $0.76 per gallon as of December 10,
2004.
During the three months ended September 30, 2004, the segments were not
able to fully pass these increases on to their respective customers resulting in
a decline in per gallon margins (in the base business, excluding the impact of
acquisitions) for the three months ended September 30, 2004 as compared to the
three months ended September 30, 2003 of approximately 2.3 cents at the heating
oil segment and 2.9 cents at the propane segment. The per gallon margins
realized at both segments were significantly less than expectations.
The Partnership continues to experience high wholesale supply costs and
believes that it will not be able to pass all these increases on to its
customers through retail sales prices. If wholesale supply costs remain at
volatile and historically high levels, per gallon profit margins and results are
likely to be adversely impacted.
The continuous rise and the volatility in the price of heating oil have
adversely impacted the heating oil segment's per gallon gross profit margins.
Preliminary indications are that the per gallon margins for the period from
October 1, 2004 to November 30, 2004 will be lower than the comparable period
for fiscal 2003. At the propane segment, preliminary indications are that the
per gallon gross profit margins for the period from October 1, 2004 to November
30, 2004 will be lower than the prior year's comparable period.
Operating Expenses
Late in the fourth quarter of fiscal 2004, the heating oil segment launched
a new marketing campaign and its success has yet to be determined. For the
period from October 1, 2004 to November 30, 2004, based upon the preliminary
information available to it, the heating oil segment anticipates that operating
expenses will increase by $4.5 million, as compared to the prior year's two-
month period, due to wage and cost increases, additional expenses associated
with the outsourced call center and higher marketing costs of $1.3 million. At
the propane segment, the Partnership believes that operating expenses will also
increase by $2.0 million. In addition, the Partnership anticipates additional
fees and expenses at the heating oil segment and at the partnership level
attributable to the refinancings described below.
Sale of Propane and Refinancing Costs and Expenses
The Partnership has signed an agreement to sell its propane distribution
and services business, held through the propane segment to Inergy for $475
million, subject to certain adjustments. In addition, the Partnership has given
notice to holders of the secured notes of the heating oil segment of its
optional election to prepay the secured notes, representing an aggregate
payment, including principal, interest and estimated premium, of approximately
$182 million. The Partnership has also given notice to the holders of the
secured notes of its propane segment of its optional election to prepay the
secured notes representing an aggregate payment including principal, interest
and estimated premium, of approximately $114 million. The aggregate amount
payable with regard to both sets of secured notes is approximately $296 million.
As discussed elsewhere herein, these payments are expected to be made from
either the proceeds of the sale of the propane segment or the JP Morgan Chase
bridge facility.
The Partnership is taking steps to put in place, on or before December 17,
2004, a new asset based loan facility to refinance the working capital
indebtedness of the heating oil segment as well as a bridge facility to provide
funds to repay the heating oil segment's and propane segment's institutional
indebtedness if the sale of the propane segment is not completed by such date.
In connection with the sale of the propane segment, the refinancing of the
heating oil segment's working capital facility and certain covenant
modifications required of the heating oil segment's current bank facilities, the
Partnership estimates fees and expenses associated with these transactions will
range from $20.0 million to $35.0 million. If these transactions are completed,
the Partnership estimates that between $9.0 million and $12.5 million of fees
and expenses will be charged to income during the first quarter of fiscal 2005
and between $7.6 million and $10.2 million will be capitalized as a deferred
charge. The Partnership also expects to record a loss on the early
extinguishment of long-term debt of approximately $43 million, which includes
pre-payment premiums paid of $36.5 million and the write-off of approximately
$6.2 million of previously capitalized deferred financing costs. It is estimated
that the Partnership will record a gain on the sale of the propane segment in
excess of $150 million and is subject to adjustment.
Through December 10, 2004, the Partnership had paid $8.2 million in fees
and expenses relating to the above transactions, which are included in the above
estimates.
Liquidity and Capital Resources
The ability of the Partnership to satisfy its obligations will depend on
its future performance, which will be subject to prevailing economic, financial,
business and weather conditions, the ability to pass on the full impact of
record heating oil prices to customers, the effects of higher customer attrition
and other factors, most of which are beyond its control. Future capital
requirements of the Partnership are expected to be provided by cash flows from
operating activities and cash on hand at September 30, 2004. To the extent
future capital requirements exceed cash flows from operating activities, the
Partnership anticipates that:
a) working capital will be financed by the Partnership's new revolving
credit facility as discussed below and repaid from subsequent seasonal
reductions in inventory and accounts receivable; and
b) maintenance and growth capital expenditures, mainly for customer tanks,
will be financed in fiscal 2005 by the use of the new revolving credit facility.
See "Financing and Sources of Liquidity Following Refinancing Transactions"
below.
Operating Activities
The net cash provided by operating activities of $65.8 million for fiscal
2004 consisted of net loss from continuing operations of $6.2 million, non-cash
charges of $69.6 million and $2.5 million provided from a decline in operating
assets and liabilities. For fiscal 2004, net cash provided by the change in
operating assets and liabilities was $2.5 million. In fiscal 2003, the change in
operating assets and liabilities resulted in a use of cash amounting to $17.4
million. This change of $19.9 million is largely due to the cash required to
finance accounts receivable. In fiscal 2003, sales increased by $396.4 million,
or 40.2%, to $1,382.3 million, which resulted in an increase in accounts
receivable of $24.0 million or 6.1% of the increase in sales. In contrast to the
change from fiscal 2002 to 2003, sales for fiscal 2004 increased $71.7 million,
or 5.2%, to $1,453.9 million, as compared to 2003 and resulted in an increase in
accounts receivable of $6.2 million or 8.6% of the increase in sales.
Investing Activities
During fiscal 2004, the Partnership completed 13 acquisitions, investing
$17.5 million, and spent $9.4 million for capital expenditures comprised of $4.4
million incurred to sustain operations at current levels and $5.4 million to
support growth of operations. Investing activities also includes $12.5 million
from the sale of TG&E and $2.3 million from the sale of excess fixed assets. As
a result, cash flows used in investing activities were $12.1 million.
During fiscal 2003, the Partnership completed ten acquisitions, investing
$84.4 million. This expenditure for acquisitions is included in the cash used in
investing activities of $101.2 million along with the $18.5 million invested for
capital expenditures. The $18.5 million for capital expenditures is comprised of
$7.1 million of capital additions needed to sustain operations at current levels
and $11.4 million for capital expenditures incurred in connection with the
heating oil segment's business process redesign program and for customer tanks
and other capital expenditures to support growth of operations. Investing
activities also includes proceeds from the sale of fixed assets of $1.7 million.
Financing Activities
Cash flows used in financing activities were $49.2 million for fiscal 2004.
During this period, $105.5 million of cash was provided from the issuance of
$70.5 million in MLP Notes and the issuance of $35.0 million in common units.
Also during this period $154.7 million of cash was used to pay unit
distributions of $79.9 million, $64.3 million went to repay the acquisition
facility and other long-term debt, $4.0 million was used to repay working
capital borrowings, and $6.5 million in deferred charges were paid, primarily
$5.8 million relating to the renewal of the heating oil segment's bank credit
facilities and debt related financing costs.
As a result of the above activity and $1.5 million of cash provided by
discontinued operations, cash increased by $6.0 million to $16.1 million as of
September 30, 2004.
Financing and Sources of Liquidity Following Refinancing Transactions
In accordance with the JP Morgan Chase Bank Commitment Letter, the heating
oil segment and propane segment intend to enter into a $350 million revolving
credit facility agreement with a group of lenders led by JP Morgan Chase Bank,
as administrative agent on or before December 17, 2004. (Upon the sale of the
propane segment, the revolving credit facility would be reduced to $260
million). At the same time, the heating oil segment and propane segment intend
to enter into a $300 million bridge facility agreement. The revolving credit
facility agreement is intended to close on December 17, 2004, subject to
compliance with customary closing conditions. If the sale of the propane segment
closes on or before December 17, 2004, the Partnership would not draw down on
the bridge facility. Otherwise, the Partnership would expect to close the bridge
facility agreement at the same time as the closing of the revolving credit
agreement. The proceeds of the revolving credit facility and, as applicable, the
bridge facility or the sale of the propane segment, will be used to refinance
the heating oil segment and propane segment's existing working capital
facilities, to refinance all of the outstanding institutional indebtedness of
the heating oil segment and the propane segment, including any premiums that are
payable thereunder and to pay various transaction expenses.
The revolving credit facility will provide the heating oil segment and
propane segment with the ability to borrow up to $350 million for working
capital purposes (subject to certain borrowing base limitations), including the
issuance of up to $75 million in letters of credit. Obligations under the
revolving credit facility will be secured by liens on substantially all of the
assets of the heating oil segment and the propane segment, accounts receivable,
inventory, general intangibles, real property, fixtures and equipment. If the
propane segment is sold (either before or after December 17, 2004), the
revolving credit facility will be reduced to $260 million (subject to borrowing
base limitations) and the liens on all of the assets of the propane segment
would be released. Obligations under the revolving credit facility will be
guaranteed by the propane segment and heating oil segment subsidiaries and by
the Partnership.
If the sale of the propane segment does not close until after the
Partnership has drawn down on the bridge facility, the Partnership will use a
portion of the sales proceeds to repay the bridge loan. Thereafter, pursuant to
the terms of the indenture relating to the Partnership's MLP Notes, the
Partnership will be obligated, within 360 days of the sale, to apply the net
proceeds of the sale of the propane segment either to reduce indebtedness of the
Partnership or of a restricted subsidiary, or to make an investment in assets or
capital expenditures useful to the Partnership's or any subsidiary's business.
To the extent any net proceeds that are not so applied exceed $10 million
("excess proceeds"), the indenture requires the Partnership to make an offer to
all holders of MLP Notes to purchase for cash that number of MLP Notes that may
be purchased with excess proceeds at a purchase price equal to 100% of the
principal amount of the MLP Notes plus accrued and unpaid interest to the date
of purchase. The Partnership cannot determine the amount of excess proceeds that
will result from the sale of the propane segment. Accordingly, the Partnership
cannot predict the size of any offer to purchase MLP Notes and whether or to
what extent holders of MLP Notes will accept the offer to purchase when made.
If the agreement for the sale of the propane segment is terminated, the
Partnership will seek to repay the bridge facility through the issuance of
senior secured notes issued by the heating oil segment and propane segment in a
public or private offering.
Following consummation of the refinancing transactions, the Partnership's
primary source of liquidity will be internally generated cash, the remaining
proceeds from the sale of the propane segment, if such segment is sold, and the
revolving credit facility. At September 30, 2004, the Partnership would have had
$152.2 million of cash and cash equivalents available to fund its operations on
a pro forma basis after giving effect to the refinancing transactions, sale of
the propane segment and before the application of excess proceeds to purchase
MLP Notes. Total bank borrowing would be reduced from $8.0 million to zero. If
the propane segment is not sold, the Partnership would have had $3.0 million of
cash and cash equivalents available to fund its operations on a pro forma basis
as of September 30, 2004 after giving effect to the refinancing transactions.
Total bank borrowing would increase from $8.0 million to $25.8 million and the
Partnership's total availability under its new revolving credit facility would
have been $73.7 million (after giving effect to outstanding letters of credit
and expected borrowing base limitations).
After giving effect to the refinancing transactions and sale of the propane
segment, and before the application of excess proceeds to purchase MLP Notes,
the Partnership's total long-term debt would have been approximately $267.6
million as of September 30, 2004 compared to $528.1 million on an actual basis.
If the Partnership does not sell the propane segment, its total long-term debt
on a pro forma basis after giving effect to the refinancing transactions would
have been $569.8 million as of such date.
The following summarizes the long-term debt maturities that the Partnership
would have had as of September 30, 2004, on a pro forma basis, in the first case
after giving effect to the refinancing transactions and sale of the propane
segment and in the second case if the propane segment is not sold:
(in millions)
Refinancing Transactions and Refinancing Transactions Without
Sale of Propane Segment Sale of Propane Segment
- ----------------------------------------------------------------------
2005 $ 1.3 2005 $ 1.3
2006 $ 0.8 2006 $ 0.8
2007 $ - 2007 $ -
2008 $ - 2008 $ -
2009 $ - 2009 $ -
Thereafter $267.7 Thereafter $567.6
The Partnership expects that its significant liquidity requirements after
the refinancing transaction will consist of payments on MLP Notes (and the
bridge facility or senior secured notes if the propane segment is not sold) and
working capital requirements and capital expenditures.
The revolving credit facility and, as applicable, the bridge facility or
the senior secured notes, will impose certain restrictions on the Partnership,
including restrictions on its ability to incur additional indebtedness, to pay
distributions, make investments, grant liens, sell its assets and engage in
certain other activities. The revolving credit facility and, as applicable, the
bridge facility or the senior secured notes, will also require the Partnership
to maintain certain financial ratios, and will contain borrowing conditions and
customary events of default, including nonpayment of principal or interest,
violation of covenants, inaccuracy of representations and warranties,
cross-defaults to other indebtedness, bankruptcy and other insolvency events.
The occurrence of an event of default or an acceleration under the revolving
credit facility and, as applicable, the bridge facility or the senior secured
notes, would result in its inability to obtain further borrowings under that
facility, which could adversely affect its liquidity. An acceleration under the
revolving credit facility and, as applicable, the bridge facility or the senior
secured notes, would result in a default under the MLP Notes and, as applicable,
the Partnership's other funded debt.
Based on the Partnership's current level of operations, the Partnership
believes that its existing financial resources together with its current and
anticipated cash from operations, the revolving credit facility and the proceeds
of the sale of the propane segment or the bridge facility or senior secured
notes, if the propane segment is not sold, should be adequate for the
foreseeable future to make required payments of principal and interest on its
debt and fund its working capital and capital expenditure requirements. The
Partnership cannot assure you, however, that its business will generate
sufficient cash flow from operations or that future borrowings will be available
under its revolving credit facility in an amount sufficient to enable the
Partnership to service its debt, including the MLP Notes and, as applicable, the
bridge facility or the senior secured notes, and to fund its other liquidity
needs.
If the Partnership is unable to close the revolving credit facility and
either the bridge facility or the sale of the propane segment by December 17,
2004, the Partnership would not be able to find other sources of financing
before December 17, 2004 to refinance the heating oil segment's and propane
segment's credit facilities and to repay the heating oil segment's and propane
segment's institutional indebtedness, which are due and payable on such date. In
such event, if the Partnership is not successful in rescheduling the maturity
dates of such indebtedness, the Partnership may be forced to seek the protection
of the bankruptcy courts. To the extent the Partnership makes acquisitions, or
otherwise expand its operations in the future, it may require new sources of
funding, including additional debt, which could further increase its leverage.
The Partnership cannot assure you that it will be able to raise any necessary
funds in addition to those currently available to the Partnership through bank
financing or the issuance of equity or debt securities on terms acceptable to
the Partnership, if at all.
The revolving credit facility and, as applicable, the bridge facility or
the senior secured notes, will impose certain restrictions on the Partnership's
ability to pay distributions to unitholders. The Partnership believes that the
sale of the propane segment would, by de-leveraging the Partnership's balance
sheet, likely advance the time when it would be possible for the Partnership to
resume regular distributions on the common units. The Partnership believes that
whether or not the propane segment is sold, it is unlikely that the Partnership
will resume regular distributions on the senior subordinated units, junior
subordinated units and general partner units for the foreseeable future.
Historical Financing and Sources of Liquidity
At September 30, 2004, the Partnership's heating oil segment had a bank
credit facility consisting of three facilities totaling $235.0 million having a
maturity date of June 30, 2006. These facilities consisted of a $150.0 million
revolving credit facility, the proceeds of which are to be used for working
capital purposes, a $35.0 million revolving credit facility, the proceeds of
which were to be used for the issuance of standby letters of credit in
connection with surety, worker's compensation and other financial guarantees,
and a $50.0 million revolving credit facility, the proceeds of which were to be
used to finance or refinance certain acquisitions and capital expenditures, for
the issuance of letters of credit in connection with acquisitions and, to the
extent that there is insufficient availability under the working capital
facility. At September 30, 2004, $8.0 million of working capital borrowings and
$34.5 million of the insurance letters of credit were outstanding.
At September 30, 2004, the Partnership's propane segment had a bank credit
facility, which consisted of a $25.0 million acquisition facility, a $25.0
million parity debt facility that could be used to fund maintenance and growth
capital expenditures and a $24.0 million working capital facility. The working
capital facility expired on September 30, 2006. Borrowings under the acquisition
and parity debt facilities revolved until September 30, 2006, after which time
any outstanding loans thereunder, would amortize in quarterly principal payments
with a final payment due on September 30, 2008. At September 30, 2004, $2.0
million of parity debt facility borrowings were outstanding.
The Partnership's bank credit facilities and debt agreements contain
several financial tests and covenants restricting the various segments and
Partnership's ability to pay distributions, incur debt and engage in certain
other business transactions. In general these tests are based upon achieving
certain debt to cash flow ratios and cash flow to interest expense ratios. In
addition, the heating oil segment's working capital facility requires the
heating oil segment to maintain a zero balance for at least forty-five
consecutive days. The propane segment's working capital facility has a similar
requirement, which is thirty consecutive days. Failure to comply with the
various restrictive and affirmative covenants of the Partnership's various bank
and note facility agreements could negatively impact the Partnership's ability
to incur additional debt and/or pay distributions and could cause certain debt
to become currently payable.
As of September 30, 2004, the Partnership was in compliance with all debt
covenants, except for the required ratio of consolidated cash flow to
consolidated interest expense as defined in the heating oil segment's bank
facility. The heating oil segment obtained a letter amendment and waiver of this
covenant on November 5, 2004 through December 17, 2004. On October 13, 2004, the
heating oil segment advised its bank lenders that it would not be able to make
the required representations included in the borrowing certificate under its
working capital line. In addition, the heating oil segment notified its lenders
that, for the quarter ending December 31, 2004 and for the foreseeable future
thereafter, the heating oil segment will be unlikely to satisfy the drawing
condition that requires that the consolidated funded debt of the Partnership not
exceed 5.00 times its consolidated operating cash flow. Further, the heating oil
segment advised the lenders that the heating oil segment may not be able to
maintain a zero balance under the working capital facility (except for letter of
credit obligations) for 45 consecutive days from April 1, 2005 to September 30,
2005, as required by the heating oil segment's covenants.
On November 5, 2004, the heating oil segment entered into a letter
amendment and waiver under its heating oil segment credit agreement. As a result
of the amendment, the heating oil segment expects to be able to continue to
borrow funds under the credit agreement to support its working capital
requirements for the near term. The amendment provides for the waiver, through
December 17, 2004, of various terms under the credit agreement. The amendment
also amends for the waiver period the financial covenant regarding the
Partnership's consolidated funded debt to cash flow ratio and the financial
covenant regarding the heating oil segment cash flow to interest expense ratio.
The Partnership is relying upon the closing of the revolving credit facility to
provide funds to repay the amounts outstanding under the heating oil segment and
propane segment's current bank facilities and to provide an ongoing source of
working capital.
On January 22, 2004, the Partnership and Star Gas Finance Company jointly
issued $35.0 million face value senior notes due on February 15, 2013. These
notes accrue interest at an annual rate of 10.25% and require semi-annual
interest payments on February 15 and August 15 of each year commencing on
February 15, 2004. These notes are redeemable at the option of the Partnership,
in whole or in part, from time to time by payment of a premium as defined. These
notes were priced at 110.5% for total gross proceeds of $38.7 million. The
Partnership also incurred $0.5 million of fees and expenses in connection with
the issuance of these notes, resulting in net proceeds of $38.2 million. The net
proceeds from the offering were largely used to repay indebtedness.
In February 2004, the Partnership received net proceeds after expenses of
$35.0 million from a publicly underwritten equity offering for the sale of
1,495,000 common units. The net proceeds from this underwriting were largely
used to repay indebtedness.
On July 8, 2004, the Partnership and Star Gas Finance Company jointly
issued $30.0 million face value senior notes due on February 15, 2013. These
notes accrue interest at an annual rate of 10.25% and require semi-annual
interest payments on February 15 and August 15 of each year commencing on
February 15, 2004. These notes are redeemable at the option of the Partnership,
in whole or in part, from time to time by payment of a premium as defined. These
notes were priced at 106.3% for total gross proceeds of $31.9 million. The
Partnership also incurred $0.7 million of fees and expenses in connection with
the issuance of these notes, resulting in net proceeds of $31.2 million. The net
proceeds from the offering were largely used to repay indebtedness.
The Partnership has $528.1 million of debt outstanding as of September 30,
2004 (amount does not include working capital borrowings of $8.0 million), with
significant maturities occurring over the next five years. The following
summarizes the Partnership's long-term debt maturities during fiscal years
ending September 30, exclusive of amounts that have been repaid through
September 30, 2004:
(in millions)
2005 $24.4 (a)
2006 $81.4
2007 $38.7
2008 $17.6
2009 $17.5
--------------
Thereafter $348.5
(a) On November 18, 2004, the Partnership gave notice to holders of the
heating oil segment's secured notes of its optional election to prepay such
secured notes and gave notice of its optional election to prepay its propane
segment's secured notes. As a result, the amount due in fiscal 2005 increases by
$233.2 million to $257.6 million.
The Partnership's heating oil segment's bank facilities allow for the
refinancing of up to $20.0 million of existing senior debt and the Partnership's
propane segment's bank facilities allow for the refinancing of up to $25.0
million of existing senior debt. The refinancing capabilities are subject to
capacity and other restrictions. The Partnership is dependent upon the closing
of the bridge facility and/or the sale of the propane segment to fund the
repayment of this indebtedness.
In general, the Partnership distributes to its partners on a quarterly
basis, all of its Available Cash. 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. On October 18, 2004, the Partnership announced
that it would not pay a distribution on the common units as a result of the
requirements of its lenders. The Partnership had previously announced the
suspension of distributions on the senior subordinated units on July 29, 2004
and it is unlikely that regular distributions on the senior subordinated units
will be resumed in the foreseeable future. For more information on the rights
and preferences of the senior subordinated units, see the Partnership's
Partnership Agreement.
The Partnership believes that the purchase of weather insurance could be an
important element in the Partnership's ability to maintain the stability of its
cash flows. The Partnership purchased weather insurance that could have provided
up to $20.0 million of coverage for the impact of warm weather on the heating
oil segment's operating results for the 2002 - 2003 and 2003 - 2004 heating
seasons. No amounts were received under the policies during fiscal 2003 and 2004
due to colder than normal temperatures. In addition, the Partnership purchased a
base of $12.5 million of weather insurance coverage for each year from 2005 -
2007 and purchased an additional $7.5 million of weather insurance coverage for
fiscal 2005. The amount of insurance proceeds that could be realized under these
policies is calculated by multiplying a fixed dollar amount by the degree day
deviation from an agreed upon cumulative degree day strike price.
Star Gas Partners, L.P., is a leading distributor of home heating oil and
propane. The Partnership is the nation's largest retail distributor of home
heating oil and the nation's seventh largest retail propane distributor.
Additional information is available at www.star-gas.com.
This news release includes "forward-looking statements" which represent the
Partnership's expectations or beliefs concerning future events that involve
risks and uncertainties, including those associated with the effect of weather
conditions on the Partnership's financial performance, the price and supply of
home heating oil and propane, the Partnership's ability to obtain satisfactory
gross profit margins, the ability of the Partnership to obtain new accounts and
retain existing accounts, the realization of savings from the business process
redesign project at the heating oil segment, the ability of the Partnership to
correct operational problems with such project and the closings of a new
revolving credit facility and bridge facility in connection with the refinancing
transactions and the sale of the propane business. All statements other than
statements of historical facts included in this new release 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 news release as well as in the
Partnership's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and
other filings with the Securities and Exchange Commission. 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.
The report of the Partnership's independent registered public accounting
firm on the Partnership's consolidated financial statements as of September 30,
2004 and 2003 and for three years ended September 30, 2004 includes an
explanatory paragraph describing factors raising substantial doubt about the
Partnership's ability to continue as a going concern. The Partnership's
consolidated financial statements do not include any adjustment that might
result from the outcome of this uncertainty.
(financials follow)
STAR GAS PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per unit data) 2004 2003
----------- -----------
Sales:
Product $1,238,582 $1,190,913
Installations, service and appliances 215,355 191,355
----------- -----------
Total sales 1,453,937 1,382,268
Cost and expenses:
Cost of product 779,878 737,405
Cost of installations, service and
appliances 216,175 201,153
Delivery and branch expenses 325,686 293,523
Depreciation and amortization expenses 57,343 52,493
General and administrative expenses 30,029 50,331
----------- -----------
Operating income 44,826 47,363
Interest expense (49,362) (44,432)
Interest income 3,459 3,865
Amortization of debt issuance costs (3,646) (2,232)
Loss on redemption of debt - (181)
----------- -----------
Income (loss) from continuing operations
before income taxes (4,723) 4,383
Income tax expense (benefit) 1,525 1,500
----------- -----------
Income (loss) from continuing operations (6,248) 2,883
Income (loss) from discontinued operations
before cumulative effect of change in
accounting principle, and loss on sale of
segment, net of income taxes 923 1,230
Loss on sale of segment, net of income taxes (538) -
Cumulative effect of changes in accounting
principle for discontinued operations -
Adoption of SFAS No. 142 - (3,901)
----------- -----------
Net income (loss) $(5,863) $212
=========== ===========
General Partner's interest in net income
(loss) $(57) $2
----------- -----------
Limited Partners' interest in net income
(loss) $(5,806) $210
=========== ===========
Basic and diluted income (loss) from
continuing operations per Limited Partner unit $(0.18) $0.09
=========== ===========
Basic and diluted net income (loss) per
Limited Partner unit $(0.16) $0.01
=========== ===========
Weighted average number of Limited Partner
units outstanding:
Basic 35,205 32,659
=========== ===========
Diluted 35,205 32,767
=========== ===========
STAR GAS PARTNERS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
September 30,
-------------------
(in thousands, except per unit data) 2004 2003
--------- ---------
Sales:
Product $131,617 $115,134
Installations, service and appliances 49,759 50,234
--------- ---------
Total sales 181,376 165,368
Cost and expenses:
Cost of product 92,298 74,095
Cost of installations, service and appliances 48,739 48,064
Delivery and branch expenses 71,078 66,335
Depreciation and amortization expenses 14,107 13,895
General and administrative expenses 4,927 14,076
--------- ---------
Operating loss (49,773) (51,097)
Interest expense (12,526) (11,674)
Interest income 742 815
Amortization of debt issuance costs (809) (635)
--------- ---------
Loss from continuing operations before
income taxes (62,366) (62,591)
Income tax expense (benefit) 300 (735)
--------- ---------
Loss from continuing operations (62,666) (61,856)
Income (loss) from discontinued operations before
cumulative effect of change in accounting
principle, and loss on sale of segment, net of
income taxes (110) 718
Loss on sale of segment, net of income taxes (521) -
--------- ---------
Net loss $(63,297) $(66,138)
========= =========
General Partner's interest in net loss $(585) $(612)
--------- ---------
Limited Partners' interest in net loss $(62,712) $(65,526)
========= =========
Basic and diluted loss from continuing operations
per Limited Partner unit $(1.74) $(1.84)
========= =========
Basic net loss per Limited Partner unit $(1.75) $(1.97)
========= =========
Diluted net loss per Limited Partner unit $(1.75) $(1.96)
========= =========
Weighted average number of Limited Partner units
outstanding:
Basic 35,756 33,271
========= =========
Diluted 35,756 33,379
========= =========
STAR GAS PARTNERS, L.P. AND SUBSIDIARIES
SUPPLEMENTARY DATA
(in thousands)
Earnings before interest, taxes, depreciation and amortization from
continuing operations (EBITDA)
The Partnership uses EBITDA as a measure of liquidity and it is
being included because the Partnership believes that it provides
investors and industry analysts with additional information to
evaluate the Partnership's ability to pay quarterly distributions.
EBITDA is not a recognized term under generally accepted accounting
principles ("GAAP") and should not be considered as an alternative to
net income/(loss) or net cash provided by operating activities
determined in accordance with GAAP. Because EBITDA as determined by
the Partnership excludes some, but not all of the items that affect
net income/(loss), it may not be comparable to EBITDA or similarly
titled measures used by other companies. The following table sets
forth (i) the calculation of EBITDA and (ii) a reconciliation of
EBITDA, as so calculated, to cash provided by operating activities:
Three Months
September 30,
----------------------------
2004 2003
-------------- -------------
Loss from continuing operations $(62,666) $(61,856)
Plus:
Income tax expense benefit 300 (735)
Amortization of debt issuance costs 809 635
Interest expense, net 11,784 10,859
Depreciation and amortization 14,107 13,895
-------------- -------------
EBITDA $(35,666) $(37,202)
============== =============
Fiscal Year
Ended September 30,
----------------------------
2004 2003
-------------- -------------
Income from continuing operations $(6,248) $2,883
Plus:
Income tax expense 1,525 1,500
Amortization of debt issuance costs 3,646 2,232
Interest expense, net 45,903 40,567
Depreciation and amortization 57,343 52,493
-------------- -------------
EBITDA 102,169 99,675
Add/(subtract)
Loss on redemption of debt - 181
Income tax expense (1,525) (1,500)
Interest expense, net (45,903) (40,567)
Unit compensation expense 86 2,606
Provision for losses on accounts
receivable 8,749 7,726
Loss (gain) on sales of fixed assets,
net (226) (156)
Change in operating assets and
liabilities 2,490 (17,370)
-------------- -------------
Net cash provided by operating
activities $65,840 $50,595
============== =============
Three Months Ended Fiscal Year Ended
September 30, September 30,
------------------ -----------------
2004 2003 2004 2003
------ ------ ------- -------
Total gallons sold:
Heating Oil
segment 41,058 42,576 551,612 567,024
Propane segment 27,399 26,591 203,086 175,054
------ ------ ------- -------
Total gallons
sold 68,457 69,167 754,698 742,078
====== ====== ======= =======
STAR GAS PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Years Ended September 30,
(in thousands) 2004 2003
------------ ------------
ASSETS
Current assets
Cash and cash equivalents $16,058 $10,044
Receivables, net of allowance of $7,542
and $7,180, respectively 103,432 100,511
Inventories 47,624 38,561
Prepaid expenses and other current assets 67,057 51,470
Net current assets of discontinued
operations - 10,523
------------ ------------
Total current assets 234,171 211,109
------------ ------------
Property and equipment, net 247,524 261,867
Long-term portion of accounts receivables 6,337 7,145
Goodwill 276,137 272,740
Intangibles, net 180,239 201,468
Deferred charges and other assets, net 16,568 14,414
Net long-term assets of discontinued
operations - 6,867
------------ ------------
Total Assets $960,976 $975,610
============ ============
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities
Accounts payable $35,940 $27,140
Working capital facility borrowings 8,000 12,000
Current maturities of long-term debt 24,418 22,847
Accrued expenses 73,168 82,356
Unearned service contract revenue 36,768 32,036
Customer credit balances 84,162 74,716
Net current liabilities of discontinued
operations - 7,569
------------ ------------
Total current liabilities 262,456 258,664
------------ ------------
Long-term debt 503,668 499,341
Other long-term liabilities 25,081 27,829
Partners' capital (deficit)
Common unitholders 167,367 210,636
Subordinated unitholders (6,768) (57)
General partner (3,702) (3,082
Accumulated other comprehensive income
(loss) 12,874 (17,721
Total Partners' capital 169,771 189,776
Total Liabilities and Partners'
Capital $960,976 $975,610
============ ============
CONTACT: Star Gas Partners, L.P.
Richard F. Ambury, 203/328-7300
or
Jaffoni & Collins Incorporated
Robert L. Rinderman, Purdy Tran
212/835-8500 or SGU@jcir.com