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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) February 9, 2005
STAR GAS PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
Delaware 33-98490 06-1437793
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) 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 February 9, 2005, Star Gas Partners, L.P., a Delaware partnership (the
"Partnership"), issued a press release announcing its financial results for its
fiscal first quarter ending December 31, 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
February 9, 2005.
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: February 9, 2005
EXHIBIT 99.1
Star Gas Partners, L.P. Reports 2005 Fiscal First Quarter Results
STAMFORD, Conn.--(BUSINESS WIRE)--Feb. 9, 2005--Star Gas Partners,
L.P. (the "Partnership" or "Star") (NYSE: SGU, SGH), a home energy
distributor and services provider specializing in heating oil, today
announced its results of operations for the fiscal 2005 first quarter
ended December 31, 2004.
In analyzing the Partnership's financial results, the following
matters should be considered.
In December 2004, the Partnership completed the sale of its
propane business to a subsidiary of Inergy, L.P., for a purchase price
of $475 million, subject to certain adjustments. The Partnership
recognized a $153.6 million gain from the sale of the propane segment.
$311 million of the net proceeds from the sale of the propane segment
were used to repurchase the senior secured notes and first mortgage
notes of the heating oil segment and propane segment, to pay
prepayment premiums, expenses and accrued interest and to repay
amounts outstanding under the propane segment's working capital
facilities.
In accordance with the terms of the indenture relating to the
Partnership's 10 1/4% Senior Notes ("MLP Notes"), the Partnership is
obligated, within 360 days of the sale, to apply the remaining net
proceeds of the sale of the propane segment either to reduce
indebtedness (and reduce any related commitment) 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, if
any, to purchase the MLP Notes and whether or to what extent holders
of the MLP Notes will accept the offer to purchase if an offer is
made.
In December 2004, the heating oil segment signed a new $260
million revolving credit facility agreement with a group of lenders
led by JP Morgan Chase Bank, as administrative agent. The revolving
credit facility provides the heating oil segment with the ability to
borrow up to $260 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 are secured by liens on substantially all of the
assets of the heating oil segment, including accounts receivable,
inventory, general intangibles, real property, fixtures and equipment.
Obligations under the revolving credit facility are guaranteed by the
heating oil segment's subsidiaries and by the Partnership.
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 historically has resulted in the sale of
approximately 30% of its home heating oil volume in the first fiscal
quarter (October through December) and 45% of its home heating oil
volume in the second fiscal quarter (January through March), the peak
heating season, because home heating oil is primarily used for space
heating in residential and commercial buildings. The Partnership
historically has realized net income in both of these quarters and net
losses during the quarters ending June and September. In addition,
sales volume typically fluctuates from period to period in response to
variations in weather, wholesale energy prices and other factors.
Gross profit is affected not only by weather patterns, but also by
changes in customer mix. For example, sales to residential customers
historically generate higher margins than sales to other customer
groups, such as commercial or industrial customers. Changes in the
wholesale price of home heating oil caused by changes in supply or
market conditions can impact gross profit. In addition, gross profit
margins vary by geographic region. Accordingly, gross profit margins
could vary significantly from year to year or quarter to quarter in a
period of identical sales volumes.
For the quarter ended December 31, 2004, the average wholesale
price of home heating oil as measured by the closing price on the New
York Mercantile Exchange increased 65% to $1.42 per gallon from $.86
per gallon for the same quarter of last year. The unprecedented rise
in the wholesale price of heating oil has adversely impacted the
heating oil segment's margins and in its ability to attract new
customers and retain existing customers. In addition, the Partnership
believes that customers are using less home heating oil than in prior
periods given similar temperatures, due to the significant increase in
the price of home heating oil.
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 and
oil dispatch functions and engaged a centralized call center to
fulfill its telephone requirements for a majority of its home heating
oil customers. The Partnership experienced difficulties in advancing
this initiative during fiscal 2004, which adversely impacted the
customer base and the Partnership's costs.
As a result of the above and the factors set forth in the next
paragraph, the Partnership believes that the heating oil segment
experienced annual net customer attrition of approximately 6.5% in
fiscal 2004, excluding the impact of acquisitions. The 6.5% net
customer attrition rate in fiscal 2004 was higher than the level
experienced in fiscal 2003 and higher than in the preceding several
years. For fiscal 2003, before the full implementation of the business
process improvement program and before the increase in the wholesale
price of home heating oil, the Partnership experienced annual net
customer attrition of 1.3%.
The heating oil segment has continued to lose accounts in the
first quarter of fiscal 2005. For the three months ended December 31,
2004, the heating oil segment lost approximately 3,300 accounts (net),
or 0.7% of its home heating oil customer base as compared to the three
months ended December 31, 2003 (a period after the implementation of
the initiative), in which the heating oil segment lost approximately
3,000 accounts (net), or 0.6% of its home heating oil customer base,
and as compared to the three months ended December 31, 2002 (a period
prior to the implementation of the initiative) in which the heating
oil segment gained 3,700 accounts (net), or 0.8% of its home heating
oil customer base. For the twelve months ended December 31, 2004, the
heating oil segment experienced annual net customer attrition of
approximately 6.5%. The Partnership believes that net customer
attrition for the three months ended December 31, 2004 resulted from
(i) a combination of the premium service/premium price strategy of the
heating oil segment during a period when customer price sensitivity
increased with high energy prices; (ii) the lag effect of net customer
attrition related to service and delivery problems from prior fiscal
years; (iii) the heating oil segment's telephone handling skills not
being sufficiently developed to the level associated with other
premium service providers ; and (iv) tightened credit standards.
The Partnership believes it has identified the problems associated
with its centralization efforts and is taking steps to address these
issues. However, the Partnership expects that high net attrition rates
will continue through the 2004-2005 winter heating season and perhaps
beyond for the reasons described above. The Partnership notes that
even to the extent that the rate of attrition can be halted, the
current reduced customer base will adversely impact net income for
fiscal 2005 and beyond. The Partnership continues to explore
approaches to reduce the rate of net customer attrition.
Virtually all of the quantitative factors measuring the
effectiveness of the call center and field operations - such as
customer satisfaction scores, telephone waiting times and abandonment
rates at the call center, oil delivery run-outs and heating equipment
repair and maintenance response times - have improved meaningfully
during the first fiscal quarter of 2005, as compared to the first
fiscal quarter of 2004. Nonetheless, the Partnership believes that
customer sensitivity at the call center will require additional
training. Most importantly, net customer attrition is also being
addressed by a more market responsive pricing strategy that involves
segmenting customers by price plan preferences, years of service and
differing geographic competitive market conditions. The Partnership
cannot give any assurance, however, as to whether and to what extent
these and other initiatives it is undertaking will be effective, and
if so, at what time.
The following is a discussion of the results of operations of the
Partnership and its subsidiaries. The Partnership completed the sale
of its TG&E segment in March 2004 and the sale of its propane segment
in December 2004. The following discussion reflects the historical
results for the TG&E segment and propane segment as discontinued
operations.
Three Months Ended December 31, 2004
Compared to December 31, 2003
(in thousands)
Statements of Operations by Segment
Three Months Ended December 31,
--------------------------------
2003
- -------------------------------------- -------------------------------
Heating Partners
Statements of Operations Oil & Others Consol.
Sales:
Product $264,205 $264,205
Installations, service and
appliances 51,865 51,865
--------- -------- ---------
Total sales 316,070 316,070
Cost and expenses:
Cost of product 168,687 168,687
Cost of installations, service and
appliances 57,206 57,206
Delivery and branch expenses 60,678 60,678
Depreciation & amortization
expenses 9,517 9,517
General and administrative
expenses 3,573 2,128 5,701
--------- -------- ---------
Operating income (loss) 16,409 (2,128 ) 14,281
Interest expense - net (6,251 ) (2,219 ) (8,470 )
Amortization of debt issuance costs (1,062 ) (166 ) (1,228 )
Loss on redemption of debt - - -
--------- -------- ---------
Income (loss) from continuing
operations before income taxes 9,096 (4,513 ) 4,583
Income tax expense 331 - 331
--------- --------- ----------
Income (loss) from continuing
operations 8,765 (4,513 ) 4,252
Income (loss) from discontinued
operations before gain on sale of
propane segment, net of income taxes 15,060 15,060
Gain on sale of propane segment, net
of income taxes - - -
--------- -------- ---------
Net income (loss) $8,765 $10,547 $19,312
========= ======== =========
Three Months Ended December 31,
--------------------------------
2004
- ------------------------------------- --------------------------------
Heating Partners
Statements of Operations Oil & Others Consol.
Sales:
Product $297,119 $ $297,119
Installations, service and
appliances 53,575 53,575
--------- --------- ---------
Total sales 350,694 350,694
Cost and expenses:
Cost of product 222,903 222,903
Cost of installations, service and
appliances 58,375 58,375
Delivery and branch expenses 65,480 65,480
Depreciation & amortization
expenses 9,122 9,122
General and administrative
expenses 6,856 8,986 15,842
--------- --------- ---------
Operating income (loss) (12,042 ) (8,986 ) (21,028 )
Interest expense - net (7,871 ) (2,621 ) (10,492 )
Amortization of debt issuance costs (509 ) (206 ) (715 )
Loss on redemption of debt (24,192 ) (17,890 ) (42,082 )
--------- --------- ---------
Income (loss) from continuing
operations before income taxes (44,614 ) (29,703 ) (74,317 )
Income tax expense 331 - 331
---------- ---------- ---------
Income (loss) from continuing
operations (44,945 ) (29,703 ) (74,648 )
Income (loss) from discontinued
operations before gain on sale of
propane segment, net of income taxes - (4,552 ) (4,552 )
Gain on sale of propane segment, net
of income taxes - 153,644 153,644
--------- --------- ---------
Net income (loss) $(44,945 ) $119,389 $74,444
========= ========= =========
Volume
For the three months ended December 31, 2004, retail volume of
home heating oil declined by 24.9 million gallons, or 14.9%, to 142.3
million gallons, as compared to 167.2 million gallons for the three
months ended December 31, 2003. Volume of other petroleum products
declined by 3.4 million gallons or 14.6% to 20.0 million gallons for
the three months ended December 31, 2004, as compared to 23.4 million
gallons for the three months ended December 31, 2003. An analysis of
the change in the retail volume of home heating oil, which is based on
management's estimates, sampling and other mathematical calculations,
is found below:
(in millions of gallons)
--------------------
Heating Oil
Segment
Volume - Three Months Ended December 31, 2003 167.2
Impact of warmer temperatures (a) (1.7)
Impact of acquisitions 1.0
Net customer attrition (10.5)
Conservation ( 6.0)
Delivery scheduling ( 4.6)
Other ( 3.1)
--------------------
Change (24.9)
--------------------
Volume - Three Months Ended December 31, 2004 142.3
====================
(a) Represents actual reported temperatures adjusted to capture the
lag effect of colder temperatures experienced in the last week of
December 2004, as compared to the last week of December 2003.
The Partnership believes that this 24.9 million gallon home
heating oil decline at the heating oil segment was due to net customer
attrition, which occurred in fiscal 2004 and the first fiscal quarter
of 2005, conservation, delivery scheduling, the lag effect of colder
temperatures experienced late in December 2004 and other factors
partially offset by acquisitions. 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 customer attrition. The Partnership
believes that for both fiscal 2004 and the twelve months ended
December 31, 2004, the heating oil segment experienced net customer
attrition of approximately 6.5%. Temperatures in the heating oil
segment's geographic areas of operations were approximately 2.0%
colder in the three months ended December 31, 2004 than in the three
months ended December 31, 2003 and approximately 2.0% warmer than
normal, as reported by the National Oceanic Atmospheric Administration
("NOAA"). While temperatures were slightly colder than the prior year,
the Partnership believes that the quarterly volume comparison was not
significantly impacted by the colder weather. The majority of the
colder weather was experienced during the last week of December 2004
and impacted only those customers who received a delivery during that
week. Due to the significant increase in the price per gallon of home
heating oil, the Partnership believes that customers are using less
home heating oil given similar temperatures. Preliminary indications
based on internal studies suggest that the Partnership's customers are
reducing their consumption by approximately 3.6%. The Partnership
cannot determine if conservation is a permanent or temporary
phenomenon. The Partnership also estimates that during the three
months ended December 31, 2004, home heating oil volume was adversely
impacted by 4.6 million gallons, as the heating oil segment attempted
to deliver budget volume in the preceding quarter that exceeded
deliveries under historic patterns during that period.
Product Sales
For the three months ended December 31, 2004, product sales
increased $32.9 million, or 12.5%, to $297.1 million, as compared to
$264.2 million for the three months ended December 31, 2003 due to an
increase in selling prices which more than offset a decline in product
sales due to the lower home heating oil volume sold. Selling prices
were higher due to the increase in wholesale supply costs.
Sales, Installation, Service and Appliances
For the three months ended December 31, 2004, installation,
service and appliance sales increased $1.7 million, or 3.3%, to $53.6
million as compared to $51.9 million for the three months ended
December 31, 2003 due to measures taken in the last several years to
increase service revenues.
Cost of Product
For the three months ended December 31, 2004, cost of product
increased $54.2 million, or 32.1%, to $222.9 million, as compared to
$168.7 million for the three months ended December 31, 2003. This is
the result of an increase in the heating oil segment's average
wholesale product cost of $0.46 per gallon, or 52.0%, to an average of
$1.34 per gallon for the three months ended December 31, 2004, from an
average of $0.88 for the three months ended December 31, 2003. As of
September 30, 2004, the wholesale cost of home heating oil had
increased by 78% to $1.39 per gallon from $0.78 as of September 30,
2003, as measured by the closing price on the New York Mercantile
Exchange. During the three months ended December 31, 2004, the closing
price of home heating oil on the New York Mercantile Exchange
increased to a high of $1.59 per gallon on October 22, 2004. As of
December 31, 2004, the wholesale cost of home heating oil was $1.23,
which represents a 35% increase over the heating oil price per gallon
of $0.91 on December 31, 2003, as measured by the closing price on the
New York Mercantile Exchange.
In an effort to reduce net customer attrition, the heating oil
segment delayed increasing its selling price to customers whose price
plan agreements expired during the July to September 2004 time period.
This decision negatively impacted gross profit by an estimated $1.7
million for the three months ended December 31, 2004.
For the three months ended December 31, 2004, cost of product at
the heating oil segment was adversely impacted by $2.9 million due to
a delay in hedging the price of product for certain residential
protected price customers due to cash constraints under the heating
oil segment's previous credit agreement. Cost of product was also
adversely impacted by $0.8 million associated with not hedging the
price of product for certain residential price protected customers
that were incorrectly coded as variable customers until December 2004.
Home heating oil per gallon margins for the three months ended
December 31, 2004 declined by 5.2 cents per gallon, as compared to the
three months ended December 31, 2003 due to an increase in the
percentage of volume sold to lower margin residential price protected
customers, the delay in increasing the selling price to customers
whose price plan expired during the July to September 2004 time period
and the aforementioned issues concerning price protected customers.
For the three months ended December 31, 2004, the increase in product
cost exceeded the increase in product sales by $21.3 million, as
compared to the three months ended December 31, 2003, due to the
decline in home heating oil volume and lower home heating oil per
gallon margins.
The home heating oil segment's customer base is comprised of three
types of customers, residential variable, residential protected price
and commercial/industrial. The selling price for a residential
variable customer is established by the Partnership's pricing
committee from time to time based on market conditions and generally
has the highest per gallon gross profit margin. A residential
protected price heating oil customer enters into an agreement to
purchase home heating oil at a fixed or maximum price per gallon over
a 12-month period. Due to the greater price sensitivity of residential
protected price customers, the per gallon margins realized from that
customer segment generally are less than variable priced residential
customers. Commercial/industrial customers are characterized as large
volume users and contribute the lowest per gallon margin.
During periods of rising heating oil prices, as recently
experienced a number of residential consumers have migrated to price
protection plans. At the heating oil segment, the percentage of home
heating oil volume sold to residential protected price customers
increased to 49% of total home heating oil volume sales for the three
months ended December 31, 2004, as compared to 41% for the three
months ended December 31, 2003. Accordingly, the percentage of home
heating oil volume sold to residential variable customers decreased to
35% for the three months ended December 31, 2004, as compared to 43%
for the three months ended December 31, 2003. For the three months
ended December 31, 2004, sales to commercial/industrial customers
represented 16% of total home heating oil volume sales, unchanged from
the three months ended December 31, 2003. Rising energy costs have
increased consumer interest in price protection. The Partnership is
exploring more market responsive pricing strategies including customer
segmentation by years of service and differing geographic competitive
market conditions to meet this increased consumer sensitivity.
However, if wholesale supply costs remain volatile and/or at
historically high levels, per gallon profit margins and results could
continue to be adversely impacted.
Cost of Installations, Service and Appliances
For the three months ended December 31, 2004, costs of
installations, service and appliances increased $1.2 million, or 2.0%,
to $58.4 million, as compared to $57.2 million for the three months
ended December 31, 2003. This change was primarily due to wage and
other cost increases.
Delivery and Branch Expenses
For the three months ended December 31, 2004, delivery and branch
expenses increased $4.8 million, or 7.9%, to $65.5 million, as
compared to $60.7 million for the three months ended December 31,
2003. This increase was due to higher marketing expenses of $1.7
million, additional costs to operate the centralized call center of
$0.8 million and an estimated $1.9 million due to operating and wage
increases. 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 service
equipment dispatch and engaged a centralized call center to respond to
telephone inquiries. While virtually all of the quantitative factors
measuring the effectiveness of the call center and field operations -
such as telephone waiting times and abandonment rates at the call
center, oil delivery run-outs and heating equipment repair and
maintenance response times - have improved meaningfully during the
first fiscal quarter of 2005 as compared to the first fiscal quarter
of 2004, the savings from this initiative were less than expected and
the costs to operate under this centralized format were greater than
originally estimated.
Depreciation and Amortization
For the three months ended December 31, 2004, depreciation and
amortization expenses declined by $0.4 million, or 4.2%, to $9.1
million, as compared to $9.5 million for the three months ended
December 31, 2003.
General and Administrative Expenses
For the three months ended December 31, 2004, general and
administrative expenses increased by $10.1 million, or 177.9%, to
$15.8 million, as compared to $5.7 million for the three months ended
December 31, 2003. At the Partnership level, general and
administrative expenses increased by $6.9 million from $2.1 million in
the three months ended December 31, 2003, to $9.0 million in the three
months ended December 31, 2004, as a $2.3 million reduction in
compensation expense associated with unit appreciation rights was more
than offset by $7.5 million in bridge financing fees and $1.5 million
of legal expenses incurred relating to inquiries from the New York
Stock Exchange and the Securities and Exchange Commission, by several
purported class action lawsuits as well as legal and professional fees
associated with exploring several refinancing alternatives. At the
heating oil segment, general and administrative expenses increased by
$3.3 million, or 91.9%, to $6.9 million for the three months ended
December 31, 2004, from $3.6 million for the three months ended
December 31, 2003. This increase was attributable to $2.9 million of
expenses and fees associated with certain bank amendments and waivers
obtained during the three months ended December 31, 2004.
Operating Income (Loss)
For the three months ended December 31, 2004, operating income
decreased $35.3 million to a loss of $21.0 million, as compared to
$14.3 million in operating income for the three months ended December
31, 2003. This decline was due to lower sales volume, a decrease in
home heating oil margins of 5.2 cents per gallon, $11.9 million in
bridge facility, legal and bank amendment fees and an increase in
operating expenses. Operating expenses increased due to higher
marketing expenses of $1.7 million, additional expenses to operate the
call center of $0.8 million and an estimated $1.9 million in operating
and wage increases.
Loss on Redemption of Debt
For the three months ended December 31, 2004, the Partnership
recorded a $42.1 million loss on the early redemption of certain notes
at the heating oil and propane segments. The loss consists of cash
premiums paid of $37.0 million for early redemption, the write-off of
previously capitalized net deferred financing costs of $6.1 million
and legal expenses of $0.7 million, reduced in part by a $1.7 million
basis adjustment to the carrying value of long-term debt.
Interest Expense
For the three months ended December 31, 2004, interest expense
increased $1.6 million, or 16.9%, to $10.9 million, as compared to
$9.3 million for the three months ended December 31, 2003. This
increase was due to a higher principal amount of long-term debt
outstanding and an increase in the Partnership's weighted average
interest rate during the three months ended December 31, 2004, as
compared to the three months ended December 31, 2003.
Amortization of Debt Issuance Costs
For the three months ended December 31, 2004, amortization of debt
issuance costs decreased $0.5 million, or 41.7%, to $0.7 million, as
compared to $1.2 million for the three months ended December 31, 2003.
During the three months ended December 31, 2003, certain deferred
financing costs were written off.
Income Tax Expense
Income tax expense for the three months ended December 31, 2004
was $0.3 million and represents certain state income taxes. Income tax
expense for the three months ended December 31, 2004 was unchanged
from the three months ended December 31, 2003.
Income (Loss) From Continuing Operations
For the three months ended December 31, 2004, income (loss) from
continuing operations decreased $78.9 million, to a loss of $74.6
million, as compared to income of $4.3 million for the three months
ended December 31, 2003. This decline was due to a $42.1 million loss
on redemption of debt, the impact of lower volume, a 5.2 cent per
gallon reduction in home heating oil gross profit margins, expenses
attributable to the bridge facility, bank amendments and legal
expenses totaling $11.9 million, operating and wage increases and an
increase in interest expense.
Income (Loss) From Discontinued Operations
For the three months ended December 31, 2004, income from
discontinued operations decreased $19.6 million. Income from the
discontinued propane segment, which was sold on December 17, 2004,
decreased $19.0 million to a loss of $4.6 million for the three months
ended December 31, 2004, as compared to income of $14.4 million for
the three months ended December 31, 2003. For the month of December
2003, the propane segment realized net income of $11.5 million. For
the two months ended November 30, 2004, the propane segment had a loss
of $4.6 million, as compared to income of $2.9 million for the two
months ended November 30, 2003. This $7.5 million decrease at the
discontinued propane segment was due to lower volume sales, a decrease
in per gallon margins and higher operating expenses. The discontinued
TG&E segment, which was sold on March 31, 2004, generated $0.7 million
in income for the three months ended December 31, 2003.
Gain On Sale of the Propane Segment
For the three months ended December 31, 2004, the Partnership
recorded a $153.6 million gain on the sale of the propane segment,
which is net of income taxes of $3.0 million.
Net Income
For the three months ended December 31, 2004, net income increased
$55.1 million, to $74.4 million, as compared to $19.3 million in net
income for the three months ended December 31, 2003, as the $153.6
million gain on the sale of the propane segment was reduced by lower
income from continuing operations of $78.9 million and a $19.6 million
decrease in income from discontinued operations.
Earnings From Continuing Operations Before Interest, Taxes,
Depreciation and Amortization (EBITDA)
For the three months ended December 31, 2004, EBITDA declined
$77.8 million, to an EBITDA loss of $54.0 million as compared to $23.8
million for the three months ended December 31, 2003. This decrease
was due to the recording of a $42.1 million loss on the redemption of
debt, lower sales volume resulting from net customer attrition,
conservation and other factors, a decrease in home heating oil per
gallon margins of 5.2 cents, bridge facility, bank amendment fees and
legal fees totaling $11.9 million and higher operating expenses.
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 three months ended December 31 as
follows.
Three Months Ended
December 31,
---------------------------
(in thousands) 2003 2004
---------- ---------------
Income (loss) from continuing operations $4,252 $(74,648 )
Plus:
Income tax expense 331 331
Amortization of debt issuance costs 1,228 715
Interest expense, net 8,470 10,492
Depreciation and amortization 9,517 9,122
---------- ---------------
EBITDA 23,798 (53,988 ) (a)
Add/(subtract)
Income tax expense (331 ) (331 )
Interest expense, net (8,470 ) (10,492 )
Unit compensation expense 52 18
Provision for losses on accounts
receivable 1,543 1,721
Loss on redemption of debt - 42,082
Gain on sales of fixed assets, net (136 ) (73 )
Change in operating assets and
liabilities (53,981 ) (130,832 )
--------- ----------
Net cash used in operating
activities $(37,525 ) $(151,895 )
========= ==========
(a) Includes one-time expenses of $42.1 million related to early debt
redemption.
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 high heating oil prices to customers, the
effects of higher customer attrition, conservation 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 December 31, 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 revolving
credit facility as discussed below and repaid from subsequent
seasonal reductions in inventory and accounts receivable;
b) maintenance and growth capital expenditures will be financed in
fiscal 2005 with internally generated cash flows; and
c) proceeds from the sale of the propane segment will be utilized.
Operating Activities
Net cash used in operating activities of $151.9 million for the
three months ended December 31, 2004 consisted of net income of $74.4
million, non cash charges of $11.6 million, a $4.6 million loss from
discontinued operations, a $42.1 million loss on the redemption of
certain debt, a gain on the sale of the propane segment of $153.6
million and an increase in operating assets of $130.8 million. For the
three months ended December 31, 2003, net cash used in operating
activities was $37.5 million.
Investing Activities
During the three months ended December 31, 2004, the Partnership
completed the sale of the propane segment. The net proceeds, after
deducting expenses, were approximately $464.0 million. During the
three months ended December 31, 2004, the heating oil segment spent
$0.8 million for capital expenditures and received proceeds from the
sale of certain assets of $0.5 million. As a result, cash flow
provided by investing activities was $463.7 million. During the three
months ended December 31, 2003, the heating oil segment received $0.4
million from the sale of certain assets and spent $0.9 million for
capital expenditures.
Financing Activities
Cash flows used in financing activities were $192.7 million for
the three months ended December 31, 2004. During this period, $230.0
million of cash was provided from borrowings under the heating oil
segment's new revolving credit facility, which were used to repay
$119.0 million borrowed under the heating oil segment's previous
credit agreement. Also during the three months ended December 31,
2004, the Partnership repaid $258.3 million in long-term debt, paid
$37.7 million in debt prepayment premiums and expenses and paid $7.7
million in fees and expenses related to refinancing the heating oil
segment's bank credit facilities.
As a result of the above activity and $11.4 million of cash used
by discontinued operations, cash increased by $107.7 million, to
$112.4 million as of December 31, 2004.
Financing and Sources of Liquidity
The Partnership had $269.8 million of debt outstanding as of
December 31, 2004 (which amount does not include working capital
borrowings of $119 million). The following summarizes the
Partnership's long-term debt maturities occurring over the next five
years as of December 31, 2004:
---------
(in millions)
2005 $ 1.3
2006 $ 0.8
2007 $ 0.1
2008 $ -
2009 $ -
Thereafter $ 267.7
On December 17, 2004, the Partnership's heating oil segment
entered into a $260 million revolving credit facility with a group of
lenders led by JP Morgan Chase Bank. The revolving credit facility
provides the heating oil segment with the ability to borrow up to $260
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 are
secured by liens on substantially all of the assets of the heating oil
segment, accounts receivable, inventory, general intangibles, real
property, fixtures and equipment. Under the terms of the revolving
credit facility, the heating oil segment must maintain at all times
either availability (as defined) of $25.0 million or a fixed charge
coverage ratio (as defined) of 1.1 to 1.0. As of December 31, 2004,
availability was $31.1 million and the fixed charge coverage ratio was
0.9x to 1.0.
In December 2004, the Partnership completed the sale of its
propane segment. Pursuant to the terms of the indenture relating to
the Partnership's 10 1/4% Senior Notes due 2013 ("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. Accordingly, the Partnership
cannot predict the size of any offer, if any, to purchase MLP Notes
and whether or to what extent holders of MLP Notes will accept the
offer to purchase if an offer is made.
After repayment of certain debt and transaction expenses and
estimated taxes to be paid of $3.0 million, the estimated net proceeds
from the propane segment sale were approximately $153.5 million. As of
the closing of the propane sale and application of the proceeds, the
amount of net proceeds not applied in excess of $10 million was $143.5
million. As of December 31, 2004, the heating oil segment utilized
$40.0 million of the proceeds to invest in working capital assets,
which reduces the amount available to repurchase MLP Notes to $103.5
million. The Partnership expects it may utilize a portion of the
remaining proceeds to meet future working capital needs. As of
December 31, 2004, the Partnership had cash of $112.4 million.
For the remainder of fiscal 2005, the Partnership anticipates
paying interest of $30.4 million and anticipates maintenance capital
expenditures of $2.7 million. Long-term debt repayments for the
remainder of fiscal 2005 are $1.2 million, excluding any repayments
resulting from any required offer to repay the MLP Notes, discussed
above. The Partnership continues to be challenged by the relatively
high wholesale supply costs and believes that per gallon margins are
likely to be adversely impacted. Likewise, the higher wholesale supply
cost has added to the Partnership's difficulties in both attracting
new and retaining existing customers. Customer attrition continues to
negatively impact operations. If wholesale supply costs remain at
current levels, future sales to customers could also be reduced due to
conservation.
In general, the Partnership distributes to its partners on a
quarterly basis, all of its Available Cash in the manner described in
Note 5 (Quarterly Distribution of Available Cash) of the Partnership's
Annual Report on Form 10-K. 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. The
Partnership had previously announced the suspension of distributions
on the senior subordinated units on July 29, 2004. It is unlikely that
regular distributions on the common units or senior subordinated units
will be resumed in the foreseeable future. While the Partnership hopes
to position itself to pay some regular distribution on its common
units in future years, of which there can be no assurance, it is
considerably less likely that regular distributions will ever resume
on the senior subordinated units because of their subordination terms.
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 has 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, since temperatures to date have
exceeded the degree day strike price. The Partnership does not expect
to collect any proceeds under its weather insurance policies for
fiscal 2005.
Star Gas Partners, L.P., is the nation's largest retail
distributor of home heating oil. 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, the
consumption patterns of the Partnership's customers, the Partnership's
ability to obtain satisfactory gross profit margins, the ability of
the Partnership to obtain new accounts and retain existing accounts,
the impact of the business process redesign project at the heating oil
segment, and the ability of the Partnership to address issues related
to such project . 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.
STAR GAS PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per unit data) Three Months Ended
December 31,
--------------------
2003 2004
--------- ----------
Sales:
Product $264,205 $297,119
Installations, service and appliances 51,865 53,575
--------- ---------
Total sales 316,070 350,694
Cost and expenses:
Cost of product 168,687 222,903
Cost of installations, service and appliances 57,206 58,375
Delivery and branch expenses 60,678 65,480
Depreciation and amortization expenses 9,517 9,122
General and administrative expenses 5,701 15,842
--------- ---------
Operating income (loss) 14,281 (21,028 )
Interest expense (9,301 ) (10,875 )
Interest income 831 383
Amortization of debt issuance costs (1,228 ) (715 )
Loss on redemption of debt - (42,082 )
--------- ---------
Income (loss) from continuing operations
before income taxes 4,583 (74,317 )
Income tax expense 331 331
--------- ---------
Income (loss) from continuing operations 4,252 (74,648 )
Income (loss) from discontinued operations before
gain on sale of segment, net of income taxes 15,060 (4,552 )
Gain on sale of propane segment, net of income
taxes of $3,000 - 153,644
--------- ---------
Net income $ 19,312 $ 74,444
========= =========
General Partner's interest in net income $ 194 $ 672
--------- ---------
Limited Partners' interest in net income $ 19,118 $ 73,772
========= =========
Basic and Diluted Income (Loss) per Limited
Partner Unit:
Continuing operations $ 0.12 $ (2.07 )
Discontinued operations 0.44 (0.13 )
Gain on sale of discontinued operations - 4.26
--------- ---------
Net income $ 0.56 $ 2.06
========= =========
Weighted average number of Limited Partner units
outstanding:
Basic 34,158 35,756
========= =========
Diluted 34,158 35,756
========= =========
STAR GAS PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands) Sept. 30, Dec. 31,
2004 2004
--------- ----------
ASSETS
Current assets
Cash and cash equivalents $ 4,692 $112,428
Receivables, net of allowance of $5,622 and
$4,779, respectively 84,005 151,704
Inventories 34,213 70,255
Prepaid expenses and other current assets 60,973 59,243
Current assets of discontinued operations 50,288 -
--------- ---------
Total current assets 234,171 393,630
--------- ---------
Property and equipment, net 63,701 60,564
Long-term portion of accounts receivables 5,458 6,412
Goodwill 233,522 233,522
Intangibles, net 103,925 98,469
Deferred charges and other assets, net 13,885 16,983
Long-term assets of discontinued operations 306,314 -
--------- ---------
Total Assets $960,976 $809,580
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities
Accounts payable $ 25,010 $ 20,004
Working capital facility borrowings 8,000 119,000
Current maturities of long-term debt 24,418 1,262
Accrued expenses 65,491 71,782
Unearned service contract revenue 35,361 41,966
Customer credit balances 53,927 44,051
Current liabilities of discontinued operations 50,676 -
--------- ---------
Total current liabilities 262,883 298,065
--------- ---------
Long-term debt 503,668 268,582
Other long-term liabilities 24,654 23,766
Partners' capital (deficit)
Common unitholders 167,367 233,749
Subordinated unitholders (6,768 ) 640
General partner (3,702 ) (3,030 )
Accumulated other comprehensive income (loss) 12,874 (12,192 )
--------- ---------
Total Partners' capital 169,771 219,167
--------- ---------
Total Liabilities and Partners' Capital $960,976 $809,580
========= =========
CONTACT: Star Gas
Investor Relations:
203-328-7310
or
Jaffoni & Collins Incorporated
Robert Rinderman / Purdy Tran, 212-835-8500
SGU@jcir.com