UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal year ended September 30, 1998
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OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from _________ to _________
Commission File Number: 33-98490
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STAR GAS PARTNERS, L.P.
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(Exact name of registrant as specified in its charter)
Delaware 06-1437793
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2187 Atlantic Street, Stamford, Connecticut 06902
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(Address of principal executive office) (Zip Code)
(203) 328-7300
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on which registered
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Common Units New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No___
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Indicate by check mark if disclosure of delinquent filer pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated be reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of Star Gas Partners, L.P. Common Units held by non-
affiliates of Star Gas Partners, L.P. on November 23, 1998 was approximately
$75,745,000. At November 23, 1998 there were outstanding 3,858,999 Common Units
and 2,396,078 Subordinated Units, each representing limited partner interests.
Documents Incorporated by Reference: None
STAR GAS PARTNERS, L.P.
1998 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Page
Item 1. Business 3
Item 2. Properties 12
Item 3. Legal Proceedings - Litigation 12
Item 4. Submission of Matters to a Vote of Security Holders 13
PART II
Item 5. Market for the Registrant's Units and
Related Matters 13
Item 6. Selected Historical Financial and Operating Data 14
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
Item 7A. Qualitative and Quantitive Disclosures about Market Risk 21
Item 8. Financial Statements and Supplementary Data 21
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 21
PART III
Item 10. Directors and Executive Officers of the Registrant 21
Item 11. Executive Compensation 25
Item 12. Security Ownership of Certain Beneficial Owners
and Management 27
Item 13. Certain Relationships and Related Transactions 29
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 30
2
PART I
ITEM 1. BUSINESS
STRUCTURE
Star Gas Partners, L.P. (the "Partnership" or the "MLP") was formed on
October 16, 1995 to acquire and operate the propane business of Star Gas
Corporation (the "Company", "Star Gas" or the "General Partner") and its parent
corporation Petroleum Heat and Power Co., Inc. ("Petro" and together with Star
Gas collectively the "Predecessor Company"). Substantially all of the
consolidated assets and liabilities of the MLP are accounted for by Star Gas
Propane, L.P. (the "Operating Partnership" or the "OLP") in which the MLP owns a
99% limited partnership interest and the Company owns a 1% general partnership
interest.
The General Partner directs and manages all activities of the Partnership
and the Operating Partnership and is reimbursed on a monthly basis for all
direct and indirect expenses it incurs on its behalf, including the cost of
employees.
PROPOSED ACQUISITION OF PETROLEUM HEAT AND POWER CO., INC.
On October 23, 1998, the Partnership and Petro jointly announced that they
have signed a definitive merger agreement pursuant to which Petro would become a
wholly owned subsidiary of the Partnership (the "Star Gas/Petro transaction").
This transaction would be effected through Petro shareholders exchanging their
26,562,481 shares of Petro Common Stock for 3,623,236 limited and general
partnership units of the Partnership which will be subordinated to the existing
Common Units of the Partnership.
The Partnership currently distributes to its partners, on a quarterly
basis, all of its Available Cash, which is generally all of the cash receipts of
the Partnership less all cash disbursements, with a targeted Minimum Quarterly
Distribution ("MQD") of $0.55 per unit, or $2.20 per unit on an annualized
basis. In connection with the Star Gas/Petro transaction, the Partnership will
increase the MQD to $.575 per unit or $2.30 per unit on an annualized basis.
This increase in the MQD reflects the expectation that the transaction will be
accretive to the Partnership. The increase in the MQD will also serve to raise
the threshold needed to end the subordination period.
Of the 3,623,236 subordinated Partnership units anticipated to be
distributed to Petro shareholders, 2,767,058 will be Senior Subordinated Units
and 856,178 will be Junior Subordinated Units and General Partnership Units. The
Senior Subordinated Units will be publicly registered and tradable (they are
expected to be listed on the New York Stock Exchange) and will be subordinated
with respect to distributions to the Partnership's Common Units. The Junior
Subordinated Units and General Partnership Units will not be registered nor
publicly tradable and will be subordinated to both the Common Units and the
Senior Subordinated Units. The Senior Subordinated Units will be exchanged with
holders of Petro's publicly traded Class A Common Stock and the Junior
Subordinated Units and General Partnership Units will be exchanged with
individuals that currently own both Petro's Class C Common Stock and Class A
Common Stock. Certain holders of Petro's Class C Common Stock will also exchange
their shares for Senior Subordinated Units.
It is currently contemplated that 21,180,789 shares of Petro Common Stock
will be exchanged for 2,767,058 Senior Subordinated Units of Partnership.
5,381,692 shares of Petro Common Stock, held by certain individuals who
currently own Petro Class C Common Stock, including Irik P. Sevin, Chairman of
both Petro and of the General Partner of the Partnership and other members of a
group that currently controls Petro, will be exchanged for 577,205 Junior
Subordinated Units and 278,973 General Partnership Units which are economically
equivalent to Junior Subordinated Units.
3
PROPOSED ACQUISITION OF PETROLEUM HEAT AND POWER CO., INC. (CONTINUED)
Pursuant to the subordination provision, distributions on the Partnership's
Senior Subordinated Units may be made only after distributions of Available Cash
on Common Units meet the MQD target. Distributions on the Partnership's Junior
Subordinated Units and General Partner Units may be made only after
distributions of Available Cash on Common Units and Senior Subordinated Units
meet the MQD. The Subordination Period will generally extend until the
Partnership earns and pays its MQD for three years. As a condition of the Star
Gas/Petro transaction, the current Partnership Agreement will be amended so that
no distribution will be paid on the Senior Subordinated Units, Junior
Subordinated Units, or the General Partner Units except to the extent Available
Cash is earned from operations.
Like many other publicly traded master limited partnerships, the
Partnership Agreement contains a provision which provides the General Partner
with incentive distributions in excess of certain targeted amounts. Following
the Star Gas/Petro transaction, this provision will be modified so that should
there be any such incentive distributions, they will be made pro rata to the
holders of Senior Subordinated Units, Junior Subordinated Units, and General
Partner Units.
In connection with the Star Gas/Petro transaction, the Senior Subordinated
Units, Junior Subordinated Units and General Partnership Units can earn, pro
rata, an aggregate of up to 303,000 additional Senior Subordinated Units over a
five year period for each year that Petro meets certain financial goals to a
maximum of 909,000 additional Senior Subordinated Units.
In connection with the Star Gas/Petro transaction, the Partnership intends
to raise approximately $140 million through a public offering of Common Units
and $120 million through a public or private offering of debt securities. The
net proceeds from these offerings will be used primarily to redeem and
restructure approximately $240 million in Petro public and private debt and
preferred stock. The exact terms and timing of any such offerings will depend
upon market conditions. Any such offerings will be made only by means of a
prospectus or in transactions not requiring registration under securities laws.
The foregoing statements do not constitute an offer to sell securities.
Petro has completed an exchange offer agreement with institutional holders
of an aggregate of $233 million or 98% of its public debt and preferred stock to
permit the redemption of such securities at the closing of the Star Gas/Petro
transaction. This agreement allows Petro to redeem its 9 3/8% Subordinated
Debentures, 10 1/8% Subordinated Notes and 12 1/4% Subordinated Debentures at
100%, 100% and 103.5% of principal amount, respectively, plus accrued interest
and also to redeem its 12 7/8% Preferred Stock at $23 per share, plus accrued
and unpaid dividends. In consideration for this early redemption right, Petro
has agreed to issue to such holders 3.37 shares of newly issued Petro Junior
Convertible Preferred Stock for each $1,000 in principal amount or liquidation
preference of such securities. Each share of Petro Junior Convertible Preferred
Stock will be exchangeable into .13064 of a Partnership Common Unit at the
conclusion of the Star Gas/Petro transaction representing a maximum of 102,773
Common Units. Petro also intends to restructure $66.2 million of privately held
notes currently outstanding.
Petro currently has a 40.5% equity interest in the Partnership and
the General Partner is a subsidiary of Petro. After completion of the Star
Gas/Petro transaction, the Petro shareholders will own approximately 26% of the
Partnership's equity through Subordinated Units and General Partner Units. The
holders of the Partnership's Common Units (including an estimated 6.4 million
Common Units that will be sold in the Partnership's proposed $140 million public
offering) will own an aggregate of approximately 74% equity interest in the
Partnership following the completion of the transaction. In connection with the
Star Gas/Petro transaction, the General Partner of the Partnership will be a
newly organized Delaware limited liability company that will be owned by Irik
Sevin, Audrey Sevin and two entities affiliated with Wolfgang Traber, (see Part
III Item 10 - Directors and Executive Officers of the Registrant).
4
PROPOSED ACQUISITION OF PETROLEUM HEAT AND POWER CO., INC. (CONTINUED)
A Special Committee of the Board of Directors of the General Partner acting
on behalf of the holders of the Common Units, negotiated the terms of the Star
Gas/Petro transaction. A.G. Edwards & Sons, Inc. was retained by the Special
Committee as independent financial advisor, and has rendered an opinion that the
Star Gas/Petro transaction is fair, from a financial point of view, to the
holders of Common Units.
The completion of the Star Gas/Petro transaction is subject to the receipt
of regulatory approvals, the approval of the Partnership's non-affiliated Common
unitholders and non-affiliated Petro shareholders and other necessary
partnership and corporate approvals.
BUSINESS
The Partnership is primarily engaged in the retail distribution of propane
and related equipment and supplies to residential, commercial, industrial,
agricultural and motor fuel customers. The Partnership believes that it is the
eighth largest retail propane distributor in the United States, serving
approximately 166,000 customers from 55 branch locations and 32 satellite
storage facilities in the Midwest and 19 branch locations and 14 satellite
storage facilities in the Northeast The Partnership also serves approximately 30
wholesale customers from its wholesale operation in southern Indiana.
INDUSTRY BACKGROUND
Propane is used primarily for space heating, water heating and cooking by
residential and commercial customers, which constitute the largest portion of
the customer base. Propane is extracted from natural gas or oil wellhead gas at
processing plants or separated from crude oil during the refining process.
Propane is normally transported and stored in a liquid state under moderate
pressure or refrigeration for ease of handling in shipping and distribution.
When the pressure is released or the temperature is increased, it is usable as a
flammable gas. Propane is colorless and odorless; an odorant is added to allow
its detection. Propane is clean-burning, producing negligible amounts of
pollutants when consumed. According to the National Propane Gas Association, the
domestic retail market for propane is approximately 9.4 billion gallons
annually, with limited growth for retail demand for the product. Based upon
information contained in the Energy Information Administration's Annual Energy
Review-1995, propane accounts for approximately 3.8% of household energy
consumption in the United States.
BUSINESS STRATEGY
The Partnership's strategy is to maximize its cash flow and profitability,
primarily through (i) acquisitions which have the potential for generating
attractive returns on investment, (ii) internal growth and (iii) controlling
operating costs. The retail propane industry is mature and experiences only
limited growth in total demand for the product. The propane industry is also
large and highly fragmented, with approximately 6,000 independently owned and
operated distributors. Given these characteristics, the Partnership's
acquisition strategy is focused on acquiring smaller to medium-sized local and
regional independent propane distributors, particularly those with a relatively
large percentage of residential customers which generate higher margins than
other types of customers and those located in the Midwest and Northeast, where
the Partnership believes it can attain higher margins than in other areas of the
United States.
The Partnership has had access to Petro's management expertise and believes
that it will continue to have such access whether or not the Star Gas/Petro
transaction is consummated. The Partnership believes that the extensive
experience of Petro's management team in making acquisitions in the home heating
oil industry, which has many similar characteristics to the propane industry,
provides the Partnership with a competitive advantage. Additionally, the field
of potential acquisition candidates for the Partnership has been broadened
because of the ability to acquire companies with both home heating oil and
propane operations, with the Partnership retaining the propane operations and
Petro retaining
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BUSINESS STRATEGY (CONTINUED)
the home heating oil operations or the Partnership retaining both the propane
and the home heating oil operations. In this regard, although the Partnership
does not presently have any home heating oil operations, it may consider
acquiring or retaining such operations in the future even if the Star Gas/Petro
transaction is not completed to the extent that the Partnership is able to
identify attractive acquisition candidates in the home heating oil field.
In order to facilitate the Partnership's acquisition strategy, the
Operating Partnership has entered into bank credit facilities which consist of a
$25.0 million acquisition facility (of which $9.0 million was outstanding as of
September 30, 1998) and a $12.0 million working capital facility (of which $4.8
million was outstanding as of September 30, 1998). In addition to borrowings
under the bank credit facilities, the Partnership may fund future acquisitions
from internal cash flow, the issuance of additional Partnership interests or
debt securities.
While the Partnership regularly considers and evaluates acquisitions as
part of its ongoing acquisition program, the Partnership does not currently have
any present agreements or commitments with respect to any material acquisition
other than the Petro acquisition. There can be no assurance that the Partnership
will identify attractive acquisition candidates in the future or that it will be
able to acquire such candidates or obtain financing for such acquisitions on
acceptable terms. If the Partnership is able to make acquisitions, there can be
no assurance, however, that such acquisitions will not dilute earnings and
distributions to Unitholders. The General Partner has broad discretion in making
acquisitions and it is expected that the General Partner will not generally seek
Unitholder approval of acquisitions.
MARKETING AND OPERATIONS
As of September 30, 1998, the Partnership distributed propane and provided
related services to approximately 166,000 retail customers in 13 states from 74
branch locations. The Partnership's operations are conducted under several
trademarks and trade names including: Star Gas(R), Star Gas Service(TM),
Silgas(TM), Blue Flame(R), Maingas(TM), Arrow Gas(TM), Mid-Hudson Valley
Propane(TM), Coleman Gas Service(TM), H & S Gas(TM), Isch Gas(TM), Wilhoyte L.P.
Gas(TM), Rural Natural Gas(TM), Pearl Gas(TM), Bay State-Arrow Gas(TM), Knowles
L.P. Gas(TM) and Lowe Bros. & Dad. The Partnership does not have the right to
use the trademark Star Gas(R) in the State of New York nor does the Partnership
have the right to use the Blue Flame(R) trademark in certain limited areas
outside of the Partnership's current area of operations. The marketing areas
served by the Partnership are generally rural but also include suburban areas
where natural gas is generally not available.
6
MARKETING AND OPERATIONS (CONTINUED)
The Partnership's retail operations are located primarily in the Northeast
and Midwest regions of the United States as follows:
NORTHEAST MIDWEST
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CONNECTICUT PENNSYLVANIA INDIANA KENTUCKY (CONTINUED)
Stamford Hazleton Akron Shelbyville
Hartford Wind Gap Batesville
Bedford MICHIGAN
MAINE RHODE ISLAND Bluffton Charlotte
Fairfield Davisville Coal City Hillsdale
Fryeburg College Corner Somerset Center
Skowhegan Columbia City
Wells Decatur OHIO
Windham Ferdinand Bowling Green
Greencastle Cincinnati
MASSACHUSETTS Jeffersonville Defiance
Belchertown Linton Deshler
Rochdale Madison Ft. Recovery
Westfield New Salisbury Hebron
Swansea N. Manchester Ironton
N. Vernon Kenton
NEW HAMPSHIRE N. Webster Lancaster
(from Fryeburg, ME) Portland Lewisburg
Remington Lynchburg
NEW JERSEY Richmond Macon
Maple Shade Salem Maumee
Tuckahoe Seymour McClure
Sulphur Springs Milford
NEW YORK Versailles Mt. Orab
Addison Warren North Star
Poughkeepsie Waterloo Ripley
Washingtonville Winamac Sabina
Waverly
KENTUCKY West Union
Dry Ridge
Glencoe WEST VIRGINIA
Prospect (from Ironton, OH)
The distribution of propane at the retail level generally involves large
numbers of small deliveries averaging 100-150 gallons each to the majority of
the Partnership's customer base. Homeowners or residential customers use
propane primarily for space heating, water heating, clothes drying and cooking.
Commercial customers such as motels, restaurants, retail stores and laundromats,
generally use propane for the same purposes as residential customers.
Industrial users, such as manufacturers, use propane as a heating and energy
source in the manufacturing and drying processes. In addition, propane is used
to dry crops, cure tobacco and as a fuel source for certain motor vehicles.
7
MARKETING AND OPERATIONS (CONTINUED)
During the fiscal year ended September 30, 1998, approximately 79% of the
Partnership's sales (by volume of gallons sold) were to retail customers. Of
this amount, approximately 54% of sales by volume were to residential customers,
19% to commercial/industrial customers, 19% to agricultural customers and 8% to
motor fuel customers. The remaining 21% of sales by volume were to wholesale
customers. Sales to residential customers in fiscal year 1998 accounted for 58%
of the Partnership's gross profit on propane sales, reflecting the higher-margin
nature of this segment of the retail market.
The Partnership also sells installs and services equipment related to its
propane distribution business, including heating and cooking appliances and at
some locations rents water softeners. Typical branch locations consist of an
office, appliance showroom, warehouse and service facilities, with one or more
12,000 to 30,000 gallon bulk storage tanks located on or near the premises.
Satellite facilities typically contain only bulk storage tanks.
Retail deliveries of propane are usually made to customers by means of the
Partnership's fleet of 280 bobtail and rack trucks. Propane is pumped from the
bobtail truck, which generally holds 2,000 to 3,000 gallons, into a stationary
storage tank on the customer's premises. The Partnership generally owns these
storage tanks. The capacity of these tanks ranges from approximately 24 gallons
to 1,000 gallons. The Partnership also delivers propane to retail customers in
portable cylinders, which typically are picked up and replenished at the
Partnership distribution locations, then returned to the retail customer. To a
limited extent, the Partnership also delivers propane to certain end users of
propane in larger trucks known as transports (which have an average capacity of
9,000 gallons). Users receiving transport deliveries include industrial
customers, large-scale heating accounts such as local gas utilities which use
propane as a supplemental fuel to meet peak demand requirements and large
agricultural accounts which use propane for crop drying and space heating. "See
Item 2--Properties".
A majority of the Partnership's residential customers receive their propane
supply pursuant to an automatic delivery system which eliminates the customer's
need to make an affirmative purchase decision. The Partnership delivers propane
to its customers approximately five times during the year, depending upon
weather conditions and historical consumption patterns. In addition, the
Partnership provides emergency service seven days a week, 52 weeks a year.
Management believes its propane customer base to be relatively stable. In excess
of 95% of the Partnership's retail propane customers lease their tanks from the
Partnership. In most states, certain fire safety regulations restrict the
refilling of a leased tank solely to the propane supplier that owns the tank.
Historically, the inconvenience associated with switching tanks greatly reduces
a propane customer's tendency to change their distributor.
Profits in the retail propane business are primarily based on margins, the
cents-per-gallon difference between the purchase price and the sales price of
propane. The Partnership generally purchases propane under supply contracts
spanning several months and in the spot market. These purchases are primarily
from natural gas processors and major oil companies. As a result, its supply
costs fluctuate with market price fluctuations. Should wholesale propane prices
decline in the future, the Partnership's margins on its retail propane
distribution business should increase in the short-term, because retail prices
tend to change less rapidly than wholesale prices. Should the wholesale cost of
propane increase, for similar reasons, retail margins and profitability would
likely be reduced at least for the short-term, until retail prices can be
increased.
SEASONALITY
The retail market for propane is seasonal because it is used primarily for
heating in residential and commercial buildings. Historically 70% - 75% of the
Partnership's retail propane volume is sold during the peak heating season from
October through March.
8
SEASONALITY (CONTINUED)
Consequently, sales and operating profits are largely generated during the
Partnership's first and second fiscal quarters. The Partnership seeks to reserve
cash flows from the first and second fiscal quarters for distribution to holders
of its Partnership interests in the third and fourth fiscal quarters. In
addition, sales volume traditionally fluctuates from year to year in response to
variations in weather, prices and other factors.
SUPPLY
The Partnership obtains propane from over 30 sources, all of which are
domestic or Canadian oil companies, including: Amoco Canada Marketing Corp.;
Bayway Refining Company; Domex, Inc.; Enron Gas Liquids, Inc.; Ferrell North
America; Marathon Ashland Petroleum, LLC; MarkWest Hydrocarbons; Mobil Oil
Company; Petro Canada LPG Inc.; Shell Canada Limited; Sea-3, Inc.; Shell Oil
Company; and Warren Gas Liquids, Inc. Supplies from these sources have
traditionally been readily available, although no assurance can be given that
supplies of propane will be readily available in the future.
The Partnership supplies its Midwest retail and wholesale operations
through a combination of purchases from suppliers in Mont Belvieu, Texas and
from a number of Midwest refineries. Purchases from Mont Belvieu are typically
transported by pipeline to the Partnership's 21 million gallon underground
storage facility located in Seymour, Indiana (the "Seymour Facility") and then
delivered by truck to the Midwest branches and wholesale customers. Refinery
based purchases are transported by truck from the terminal location to the
retail operations or to wholesale customers. Typically, refinery purchases are
made pursuant to market based contracts. The Partnership may enter into forward
contracts with Mont Belvieu suppliers or refineries which call for a fixed price
for the product to be purchased based on current market conditions, with
delivery occurring at a later date. In most cases, the Partnership has entered
into similar agreements to sell this product to customers for a fixed price. In
the event that the Partnership enters into a purchase contract without a
subsequent sales contract, it is exposed to some market risk. Currently, the
Partnership does not have any contracts that if market conditions were to
change, would have a material affect on its financial statements.
The Seymour Facility is located on the TEPPCO Partners, L.P. pipeline
system. The pipeline is connected to Mont Belvieu's storage facilities and is
one of the largest conduits of supply for the U.S. propane industry. The Seymour
Facility allows the Partnership to buy and store large quantities of propane
during periods of low demand, which generally occur during the summer months.
The General Partner believes that this ability allows the Partnership to achieve
cost savings to an extent generally not available to many of the Partnership's
competitors in its Midwest markets.
For fiscal 1998, 28% of the Midwest volume was purchased from various Mont
Belvieu sources, 27% was purchased from three refineries in Illinois, Kentucky
and Michigan owned by Marathon Ashland Petroleum, LLC and 23% was purchased from
three refineries in Illinois and Indiana owned by the Amoco Canada Marketing
Corp. The balance was purchased from seven separate suppliers. The Partnership
believes that its diversification of suppliers will enable it to purchase all of
its supply needs at market prices if supplies are interrupted from any of the
sources, without a material disruption of its operations.
Substantially all of the Partnership's propane supply for its Northeast
retail operations are purchased under annual supply contracts which generally
provide for pricing in accordance with market prices at the time of delivery.
Certain contracts provide for minimum and maximum amounts of propane to be
purchased. During the year ended September 30, 1998, none of the Partnership's
Northeast suppliers accounted for more than 10% of the Partnership's propane
purchases.
9
COMPETITION
The Partnership's retail propane business is highly competitive, however,
long-standing customer relationships are typical. Retail propane customers
generally lease their storage tanks from their suppliers. The lease terms and,
in most states, certain fire safety regulations restrict the refilling of a
leased tank solely to the propane supplier that owns the tank. The
inconvenience of switching tanks minimizes a customer's tendency to switch among
suppliers of propane.
Furthermore, the ability to compete effectively depends on the
Partnership's ability to reliably service the customer's needs and the ability
to maintain competitive prices. The Partnership believes that its superior
service capabilities and customer responsiveness differentiate it from many of
its competitors. Branch operations offer emergency service twenty-four hours per
day, seven days per week.
Propane competes primarily with electricity, natural gas and fuel oil as an
energy source on the basis of price, availability and portability. Propane is
generally less expensive to use than electricity for space heating, water
heating, clothes drying and cooking and competes effectively in those parts of
the country where propane is cheaper than electricity on an equivalent British
Thermal Unit basis. Propane is generally more expensive than natural gas, but
serves as an alternative to natural gas in rural and suburban areas where
natural gas is unavailable or portability of product is required. The expansion
of natural gas into traditional propane markets has historically been inhibited
by the capital costs required to expand distribution and pipeline systems.
Although the extension of natural gas pipelines tends to displace propane
distribution in the areas affected, the Partnership believes that new
opportunities for propane sales arise as more geographically remote areas are
developed. Although propane is similar to fuel oil in space heating and water
heating applications as well as in market demand and price, propane and fuel oil
have generally developed their own distinct geographic markets. Because
furnaces and appliances that burn propane will not operate on fuel oil, a
conversion from one fuel to the other requires the installation of new
equipment.
In addition to competing with alternative energy sources, the Partnership
competes with other companies engaged in the retail propane distribution
business. Competition in the propane industry is highly fragmented and
generally occurs on a local basis with other large full-service multi-state
propane marketers, smaller local independent marketers and farm cooperatives.
Based on industry publications, the Partnership believes that the ten largest
multi-state marketers, including the Partnership, account for less than 35% of
the total retail sales of propane in the United States, and that no single
marketer has a greater than 10% share of the total retail market in the United
States. Most of the Partnership's branches compete with five or more marketers.
The principal factors influencing competition among propane marketers are price
and service. Each retail distribution outlet operates in its own competitive
environment as retail marketers locate in close proximity to customers to lower
the cost of providing service. The typical retail distribution outlet has an
effective marketing radius of approximately 35 miles.
EMPLOYEES
The Partnership has no direct employees, except for certain employees of
its corporate subsidiary, Stellar Propane Service Corporation and is managed by
the General Partner pursuant to the Partnership Agreement. As of September 30,
1998, Star Gas had 624 employees providing full time services to the Operating
Partnership, of which 44 were employed by the corporate office in Stamford,
Connecticut and 580 were located in branch offices, of which 177 were
Administrative, 286 were engaged in transportation and storage and 117 were
engaged in field servicing. Approximately 78 of Star Gas' employees are
represented by six different local chapters of labor unions.
Management believes that its relations with both its union and non-union
employees are satisfactory.
10
GOVERNMENT REGULATIONS
The Partnership is subject to various federal, state and local
environmental, health and safety laws and regulations. Generally, these laws
impose limitations on the discharge of pollutants and establish standards for
the handling of solid and hazardous wastes. These laws include the Resource
Conservation and Recovery Act, the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"), the Clean Air Act, the Occupational
Safety and Health Act, the Emergency Planning and Community Right to Know Act,
the Clean Water Act and comparable state statues. CERCLA, also known as the
"Superfund law", imposes joint and several liability without regard to fault or
the legality of the original conduct on certain classes of persons that are
considered to have contributed to the release or threatened release of a
hazardous substance into the environment. Propane is not a hazardous substance
within the meaning of CERCLA. Such laws and regulations could result in civil or
criminal penalties in cases of non-compliance or impose liability for
remediation costs. To date, the Partnership has not been named as a party to any
litigation in which the Partnership is alleged to have violated or otherwise
incurred liability under any of the foregoing laws and regulations.
In connection with all acquisitions of retail propane businesses that
involve the purchase of real estate, the Partnership conducts a due diligence
investigation in an attempt to determine whether any substance, other than
propane, has been sold from or stored on any such real estate prior to its
purchase.
Such due diligence includes questioning the seller, obtaining
representations and warranties concerning the seller's compliance with
environmental laws and visual inspections of the properties, in which employees
of the General Partner, and in certain cases, independent environmental
consulting firms hired by the General Partner, look for evidence of hazardous
substances or the existence of underground storage tanks.
National Fire Protection Association Pamphlets No. 54 and No. 58, which
establish rules and procedures governing the safe handling of propane, or
comparable regulations, have been adopted as the industry standard in all of the
states in which the Partnership operates. In some states these laws are
administered by state agencies, and in others they are administered on a
municipal level. With respect to the transportation of propane by truck, the
Partnership is subject to regulations promulgated under the Federal Motor
Carrier Safety Act. These regulations cover the transportation of hazardous
materials and are administered by the United States Department of
Transportation. The Partnership conducts ongoing training programs to help
ensure that its operations are in compliance with applicable regulations. The
Partnership maintains various permits that are necessary to operate some of its
facilities, some of which may be material to its operations. Management
believes that the procedures currently in effect at all of its facilities for
the handling, storage and distribution of propane are consistent with industry
standards and are in compliance in all material respects with applicable laws
and regulations.
On August 18, 1997, the U.S. Department of Transportation ("DOT") published
its Final Rule for Continued Operation of the Present Propane Trucks ("Final
Rule"). The Final Rule is intended to address perceived risks during the
transfer of propane. The Final Rule required certain immediate changes in
industry operating procedures, including retrofitting all propane delivery
trucks with a system that would automatically shut down the delivery vehicle's
engine and propane delivery system in the event a leak was detected. The
Partnership, as well as the National Propane Gas Association ("NPGA") and the
propane industry in general, believe that the Final Rule cannot practicably be
complied with in its current form. On October 15, 1997, five of the principal
multi-state propane marketers (unrelated to the Partnership) filed an action
against the DOT in the United States District Court for the Western District of
Missouri seeking to enjoin enforcement of the Final Rule. The NPGA subsequently
filed a similar suit. Both suits are still pending. On February 13, 1998 the
Court issued a preliminary injunction prohibiting the enforcement of the Final
Rule pending further action by the Court. In addition, Congress passed and on
October 21, 1998 the President of the United States signed the FY 1999
Transportation Appropriations Act which included a provision restricting the
authority of the Department of Transportation from enforcing certain provisions
of the Final Rule. At this time, the Partnership cannot
11
GOVERNMENT REGULATIONS (CONTINUED)
determine the likely outcome of the litigation or the proposed legislation or
what the ultimate long-term cost of compliance with the Final Rule will be to
the Partnership and the propane industry in general.
Future developments, such as stricter environmental, health or safety laws
and regulations thereunder, could affect Partnership operations. It is not
anticipated that the Partnership's compliance with or liabilities under
environmental, health and safety laws and regulations, including CERCLA, will
have a material adverse effect on the Partnership. To the extent that there are
any environmental liabilities unknown to the Partnership or environmental,
health or safety laws or regulations are made more stringent, there can be no
assurance that the Partnership's results of operations will not be materially
and adversely affected.
ITEM 2. PROPERTIES
At September 30, 1998, the Partnership owned 60 of its 74 branch locations
and 36 of its 46 satellite storage facilities and leased the balance. In
addition, the Partnership owns a 21 million gallon underground storage facility
located in Seymour, Indiana in which it stores propane for the Partnership and
third parties. The Partnership leases its corporate headquarters in Stamford,
Connecticut, as well as office and training facilities in the Midwest.
The transportation of propane requires specialized equipment. The trucks
utilized for this purpose carry specialized steel tanks that maintain the
propane in a liquefied state. At September 30, 1998, the Partnership had a
fleet of 29 tractors, 37 transport trailers, 280 bobtail and rack trucks and 302
other service and pick-up trucks. The majority of these vehicles are owned. In
addition, the Partnership owns 14 and leases 34 automobiles. As of September
30, 1998, the Partnership owned approximately 237 bulk storage tanks with
typical capacities of 12,000 to 30,000 gallons, approximately 206,000 stationary
customer storage tanks with typical capacities of 24 to 1,000 gallons and
approximately 30,000 portable propane cylinders with typical capacities of 5 to
24 gallons. The obligations of the Partnership under its borrowings are secured
by liens and mortgages on all real and personal property of the Partnership.
ITEM 3. LEGAL PROCEEDINGS - LITIGATION
Propane is a flammable, combustible gas. Serious personal injury and
property damage can occur in connection with its transportation, storage or use.
The Partnership, in the ordinary course of business, is threatened with or is
named as a defendant in various lawsuits which, among other items, seek actual
and punitive damages for product liability, personal injury and property damage.
However, the Partnership is not a party to any litigation which individually or
in the aggregate could reasonably be expected to have a material adverse effect
on the results of operations or the financial condition of the Partnership. The
Partnership maintains liability insurance policies with insurers in such amounts
and with such coverages and deductibles as it believes is reasonable and
prudent. However, there can be no assurance that such insurance will be
adequate to protect the Partnership from material expenses related to such
personal injury or property damage or that such levels of insurance will
continue to be available in the future at economical prices.
12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders of the
Partnership during the fiscal year ended September 30, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S UNITS AND RELATED MATTERS
The Common Units, representing common limited partner interests in the
Partnership, are listed and traded on the New York Stock Exchange, Inc. ("NYSE")
under the symbol "SGU". The Common Units began trading on the NYSE on May 29,
1998. From December 20, 1995 through May 28, 1998, the Common Units were traded
on the NASDAQ National Market under the symbol "SGASZ". The following table
sets forth the high and low closing prices for the Common Units and the cash
distribution declared per Common Unit for the periods indicated.
COMMON UNIT PRICE RANGE
----------------------- DISTRIBUTIONS
HIGH LOW DECLARED PER UNIT
------------------------ ------------------------- -------------------------
FISCAL YEAR FISCAL YEAR FISCAL YEAR
------------------------ ------------------------- -------------------------
THREE MONTHS ENDING 1997 1998 1997 1998 1997 1998
---- ---- ---- ---- ---- ----
December 31, $23.88 $23.38 $21.75 $20.55 $0.55 $0.55
March 31, $24.63 $24.75 $20.75 $21.38 $0.55 $0.55
June 30, $21.88 $23.00 $19.00 $20.50 $0.55 $0.55
September 30, $23.50 $21.00 $21.00 $18.13 $0.55 $0.55
As of September 30, 1998, there were approximately 175 holders of record of
the Partnership's Common Units. There is no established public trading market
for the Partnership's 2,396,078 Subordinated Units, representing limited partner
interests ("Subordinated Units") which are all held by Star Gas Corporation.
The Partnership makes quarterly distributions of cash to its partners in an
aggregate amount equal to its Available Cash (as defined) for such quarter.
Available Cash generally means, with respect to any fiscal quarter of the
Partnership, all cash on hand at the end of such quarter, plus all additional
cash on hand as of the date of determination resulting from borrowings
subsequent to the end of such quarter, less the amount of cash reserves required
under certain lending arrangements and certain discretionary reserves
established by the General Partner for future cash requirements. These reserves
are retained to provide for the proper conduct of the Partnership's business,
the payment of debt principal and interest and to provide funds for distribution
during the next four quarters. The full definition of Available Cash is set
forth in the Agreement of Limited Partnership of the Partnership. The
information concerning restrictions on distributions required in this section is
incorporated herein by reference to the Partnership's Consolidated Financial
Statements which begin on page F-1 of this Report. Distributions of Available
Cash to the holders of the Subordinated Units are subject to the prior rights of
the Common unitholders to receive the MQD for each quarter during the
subordination period, and to receive any arrearages in the distribution of the
MQD on the Common Units for prior quarters during the subordination period.
13
ITEM 6. SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
The following table sets forth selected historical and other data of
the Partnership and the Predecessor Company and should be read in conjunction
with the more detailed financial statements included elsewhere in this report.
See Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The Selected Financial Data is derived from the financial information
of the Partnership and should be read in conjunction therewith.
PARTNERSHIP/PREDECESSOR COMPANY
-------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
-----------------------
STATEMENT OF OPERATIONS DATA: 1994 1995 1996(a) 1997 198(f)
----- ---- ------- ---- -------
(IN THOUSANDS, EXCEPT PER UNIT DATA)
Sales............................................ $ 128,040 $ 104,550 $ 119,634 $ 135,159 $ 111,685
Gross profit..................................... 69,487 54,890 61,077 62,948 62,187
Depreciation and amortization.................... 13,039 10,073 9,808 10,405 11,638
Operating income................................. 9,393 2,555/(b)/ 9,802 9,003 6,997
Interest expense, net............................ 10,497 8,549 7,124 6,966 7,927
Net income (loss)................................ (1,404) (6,169)/(b)/ 2,593 2,012 (955)
Net income (loss) per unit /(c)/................. $ -- $ -- $ 0.11/(e)/$ 0.37 $ (0.16)
Cash distribution declared per unit.............. $ -- $ -- $ 1.17/(e)/$ 2.20 $ 2.20
BALANCE SHEET DATA (END OF PERIOD):
Current assets................................... $ 17,374 $ 14,266 $ 17,842 $ 14,165 $ 17,947
Total assets..................................... 147,608 155,393 156,913 147,469 179,607
Long-term debt................................... 70,163 1,389 85,000 85,000 104,308
Due to Petro..................................... 8,809 86,002 -- -- --
Predecessor's equity/Partners' Capital........... 44,328 44,305 61,398 51,578 57,347
OTHER DATA:
EBITDA/(d)/...................................... $ 21,946 $ 13,541/(b)/ $ 19,870 $ 19,703 $ 18,906
Retail propane gallons sold...................... 110,069 89,133 96,294 94,893 98,870
(a) Reflects the results of operations of the Predecessor Company for the
period October 1, 1995 through December 20, 1995 and the results of the
Partnership from December 20, 1995 through September 30, 1996. The
operating results for the year ended September 30, 1996 were combined to
facilitate an analysis of the fundamental operating data. For the actual
results of the Partnership from December 20, 1995 through September 30,
1996, see Item 14, Page F-4.
(b) The decline in operating income, net income and EBITDA during the fiscal
year 1995 was primarily due to the significantly warmer than normal weather
conditions during the 1995 heating season.
(c) Net income (loss) per unit is computed by dividing the limited partners'
interest in net income (loss) by the weighted average number of limited
partner units outstanding.
(d) EBITDA is defined as operating income plus depreciation and amortization,
less net gain (loss) on sales of assets. 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.
(e) Represents net income per unit and cash distributions paid per unit for the
period December 20, 1995 through September 30, 1996.
(f) During fiscal 1998, temperatures were 14.0% warmer than normal and 11.8%
warmer than fiscal 1997 in the Partnership's marketing areas.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
In analyzing the historical financial results of the Partnership, the
following matters should be considered.
The financial results of a given year do not necessarily reflect the
full impact of that year's acquisitions. Historically, most acquisitions have
been made during the non-heating season because many sellers desire to retain
winter profits but avoid summer losses. Therefore, the effect of acquisitions
made after the heating season would not be fully reflected in the Partnership's
sales volume and operating and financial results until the following fiscal
year. In fiscal 1998, the Partnership completed six acquisitions after the
heating season, which did not positively impact fiscal 1998 results.
Gross profit margins vary according to customer mix. For example, sales
to certain customer groups, such as residential or commercial, generally
generate higher gross profit margins than sales to other customer groups, such
as agricultural customers. Accordingly, a change in customer mix can affect
gross profit without necessarily impacting total sales.
Because propane's primary use is for heating in residential and
commercial buildings, weather conditions have a significant impact on the
financial performance of the Partnership. Management believes that despite
year-to-year fluctuations, average temperatures have been relatively stable over
time. Nevertheless, as reflected by the unusually warm weather in fiscal 1998,
actual yearly weather conditions can vary substantially from historical
averages. Accordingly, in analyzing changes in financial performance, the
weather conditions in which the Partnership operated in any given period should
be considered.
The following discussion reflects the results of operations and
operating data for fiscal years 1996, 1997 and 1998. For fiscal 1996, the
Predecessor Company for the period October 1, 1995 through December 20, 1995 and
the results of the MLP from December 20, 1995 through September 30, 1996 were
combined in order to facilitate an analysis of the fundamental operating data.
FISCAL YEAR ENDED SEPTEMBER 30, 1998
- ------------------------------------
COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30, 1997
- ------------------------------------------------
VOLUME
For the year ended September 30, 1998, retail propane volume increased
4.2% or 4.0 million gallons to 98.9 million gallons, as compared to 94.9 million
gallons for fiscal 1997. This increase was due to the October 1997 acquisition
of Pearl Gas Co., and to a lesser extent, six acquisitions completed subsequent
to the end of the heating season which provided 12.1 million gallons of
additional volume. The positive impact of the fiscal 1998 acquisitions was
partially offset by temperatures which were 11.8% warmer than fiscal 1997 and
14.0% warmer than normal in the Partnership's marketing areas. For fiscal 1998,
wholesale volume declined by 12.4 million gallons or 32.3% to 26.0 million
gallons, as compared to 38.4 million gallons for fiscal 1997. This decline was
attributable to the abnormally warm winter weather and a reduction in spot sales
to certain customers.
15
SALES
Sales decreased 17.4%, or $23.5 million, to $111.7 million for fiscal
1998, as compared to $135.2 million for fiscal 1997. This decline was primarily
due to lower retail and wholesale selling prices in response to lower propane
supply costs and weather-related reductions in volume, partially offset by the
additional sales provided by acquisitions.
COST OF SALES
Cost of sales declined 31.5%, or $22.7 million, to $49.5 million for
fiscal 1998, as compared to $72.2 million for fiscal 1997. This decline was
attributable to lower wholesale propane supply costs and the weather-related
decrease in both retail and wholesale volumes.
GROSS PROFIT
Gross profit declined 1.2%, or $0.7 million, to $62.2 million for
fiscal 1998, as compared to $62.9 million for fiscal 1997. This change in gross
profit was attributable to lower wholesale volume and a decline in wholesale
margins. The gross profit provided by the acquisitions partially offset the
impact of the warm weather on retail and wholesale gross profit.
DELIVERY AND BRANCH EXPENSES
Delivery and branch expenses increased 2.2%, or $0.8 million, to $37.2
million for fiscal 1998, as compared to $36.4 million for fiscal 1997. This
increase of 2.2% was less than the 4.2% increase in retail propane volume. The
Partnership was able to partially offset $3.1 million of additional operating
costs associated with operating an approximately 12% larger business, by
reducing personnel costs, insurance expense and certain other discretionary
costs by $2.3 million, reflecting management's response to the warm winter
weather and continuing efforts to reduce operating expenses.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased $1.2 million to $11.6
million for fiscal 1998, as compared to $10.4 million for fiscal 1997. This
increase was due to the additional depreciation and amortization expenses
associated with the fiscal 1998 acquisitions and capital expenditures made
during fiscal 1998 and 1997.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses decreased by $0.7 million to $6.1
million for fiscal 1998, as compared to $6.8 million for fiscal 1997. This
decline was primarily due to the recognition of $0.9 million of expenses in
fiscal 1997 relating to the strategic initiative, which was concluded in March
1997.
INTEREST EXPENSE, NET
Interest expense, net of interest income, increased 13.8%, or $0.9
million to $7.9 million for fiscal 1998, as compared to $7.0 million for fiscal
1997. This increase was primarily due to an increase in long-term debt
associated with the Pearl Gas and other acquisitions.
16
NET INCOME (LOSS)
Net income (loss) declined $3.0 million to a loss of $1.0 million for
fiscal 1998, as compared to net income of $2.0 million for fiscal 1997. This
change in net income was due to lower wholesale gross profit and to the increase
in depreciation, amortization and interest expenses associated with Pearl Gas
and six additional acquisitions.
EBITDA
EBITDA (defined as operating income (loss) plus depreciation and
amortization less net gain (loss) of sale of equipment) declined $0.8 million or
4.0% to $18.9 million for fiscal 1998, as compared to $19.7 million for fiscal
1997. This small decline occurred in a period in which temperatures were 11.8%
warmer than fiscal 1997 and 14.0% warmer than normal. The Partnership was able
to mitigate the effects of the abnormally warm winter weather by the additional
EBITDA provided from acquisitions, an increase in retail margins and a reduction
in delivery, branch and administrative 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.
FISCAL YEAR ENDED SEPTEMBER 30, 1997
- ------------------------------------
COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30, 1996
- ------------------------------------------------
VOLUME
For the year ended September 30, 1997, retail propane volume declined
1.4 million gallons, or 1.5%, to 94.9 million gallons, as compared to 96.3
million gallons for fiscal 1996. The decline was primarily attributable to the
effect on volume of warmer temperatures experienced during the second fiscal
quarter compared to the prior year's second fiscal quarter and to customer
conservation efforts attributable to significantly higher propane selling
prices. The Partnership was able to mitigate the effects of the warmer
temperatures on retail propane volume through both internal account growth and
two acquisitions completed subsequent to the fiscal 1996 heating season. Also
favorably impacting the year-to-year comparison was an increase in sales to
agricultural customers, resulting from a return to more normal propane demand
for agricultural uses.
SALES
For the year ended September 30, 1997, sales increased $15.6 million,
or 13.0%, to $135.2 million, as compared to $119.6 million for the year ended
September 30, 1996. The increase was due to higher selling prices in response to
an industry wide significant increase in propane supply costs experienced during
fiscal 1997.
COST OF SALES
Cost of sales increased $13.6 million, or 23.3%, to $72.2 million for
fiscal 1997, as compared to $58.6 million for fiscal 1996. The increase was due
to higher per gallon propane supply costs.
GROSS PROFIT
Gross profit increased $1.8 million, or 3.1%, to $62.9 million for
fiscal 1997, as compared to $61.1 million for fiscal 1996. The increase in gross
profit resulted from higher per gallon margins across all market segments which
was partially offset by the impact of slightly lower retail propane volume.
17
DELIVERY AND BRANCH EXPENSES
Delivery and branch expenses increased $1.6 million, or 4.8%, to $36.4
million for fiscal 1997, as compared to $34.8 million for fiscal 1996. The
increase was primarily due to the additional expenses associated with the first
fiscal quarter's increase in agricultural volume, higher vehicle operating costs
due to an increase in fuel costs and higher employee benefit expenses.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses increased $0.6 million, or 6.1%,
to $10.4 million for fiscal 1997, as compared to $9.8 million for fiscal 1996,
due to the impact of two acquisitions completed since March 15, 1996, the
amortization of certain deferred charges relating to the Partnership's First
Mortgage Notes and depreciation expense associated with capital expenditures
made during fiscal 1997 and 1996.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased $0.3 million, or 5.6%, to
$6.8 million for fiscal 1997, as compared to $6.5 million for fiscal 1996. This
increase was primarily due to $0.9 million of one-time expenses associated with
the exploration of strategic alternatives designed to maximize unitholder value
offset by lower acquisition related expenses. On March 3, 1997, the General
Partner decided to terminate its efforts to seek a merger or possible sale of
the Partnership.
INTEREST EXPENSE, NET
Interest expense, net of interest income, declined $0.1 million, or
2.2%, to $7.0 million for fiscal 1997, as compared to $7.1 million for fiscal
1996. This reduction was primarily due to a decline in the weighted average
borrowing rate.
INCOME TAX EXPENSE
Income tax expense primarily represents certain state income taxes
related to the Partnership's wholly owned corporate subsidiary which conducts
non-qualifying master limited partnership business.
NET INCOME
Net income decreased $0.6 million or 22.4%, to $2.0 million for fiscal
1997, as compared to $2.6 million for fiscal 1996. This decrease was
attributable to the increase in operating expenses, $0.9 million of one-time
costs associated with the exploration of strategic alternatives and $0.6 million
of depreciation and amortization, which was partially offset by $1.9 million
increase in gross profit.
EBITDA
EBITDA (defined as operating income (loss) plus depreciation and
amortization less net gain (loss) on sales of equipment) decreased $0.2 million,
or 1.0%, to $19.7 million for fiscal 1997, as compared to $19.9 million for
fiscal 1996. Excluding the one-time expenses associated with the strategic
alternative, EBITDA increased $0.7 million, or 3.7%, to $20.6 million due to
improved per gallon margins across all market segments and growth in the
customer base provided by both internal marketing and acquisition efforts.
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.
18
LIQUIDITY AND CAPITAL RESOURCES
In fiscal 1998, net cash generated by operating activities was $9.3
million, as compared to the $19.0 million generated in fiscal 1997. This decline
of $9.7 million was attributable to a reduction in cash flows provided from
operations of $1.8 million, $5.6 million relating to changes in inventory
balances and $2.3 million relating to changes in short-term liability accounts.
In fiscal 1998, the Partnership's cash investing activities included
$10.4 million in acquisitions, $2.1 million in growth capital expenditures and
$2.6 million in maintenance capital expenditures. In connection with the Pearl
acquisition, the Partnership acquired $1.8 million in cash, which was used to
partially fund these expenditures.
In fiscal 1998, the Partnership raised $40.0 million from long-term
financing activities, which included $20.2 million from the sale and issue of
additional Partnership interests and $19.8 million from long-term borrowings,
net of expenses. These long-term financing activities along with $4.7 million
borrowed under the Partnership's working capital facility and $9.3 million in
cash from operating activities provided $54.0 million in funds, which were used
to acquire propane dealers with an aggregate cost of $35.7 million, to purchase
fixed assets of $4.7 million, pay distributions of $13.4 million and to increase
cash by $0.2 million.
Based on its current cash position, bank credit availability and
expected net cash flow from operating activities, the Partnership expects to be
able to meet all of its obligations for fiscal 1999, as well as all of its other
current obligations as they become due. For fiscal 1999, the Partnership
anticipates paying interest on its First Mortgage Notes and acquisition facility
of $8.3 million, paying Limited and General Partner distributions and plans to
purchase fixed assets of approximately $2.5 million.
YEAR 2000
The Year 2000 issue is the result of computer programs using only the
last two digits to indicate the year. If uncorrected, such computer programs
will not be able to interpret dates correctly beyond the year 1999 and, in some
cases prior to that time (as some computer experts believe), which could cause
computer system failures or other computer errors disrupting business
operations. Recognizing the potentially severe consequences of the failure to be
Year 2000 compliant, the Partnership's management has developed and implemented
a company-wide program to identify and remedy the Year 2000 issues.
The scope of the Partnership's Year 2000 readiness program includes the
review and evaluation of the Partnership's information technology (IT) such as
hardware and software utilized in the operation of the Partnership's business.
If needed modifications and conversions are not made on a timely basis, the Year
2000 issue could cause interruption in delivering propane product to customers
or prevent the Partnership from fulfilling their service needs. The Partnership
is currently using internal and external resources to identify and correct
systems that are not Year 2000 compliant. Since the Partnership does not
internally develop software for its own use, software developed externally is
being evaluated for Year 2000 compliance. This software is being upgraded or
replaced if it is determined that it is not compliant.
As part of this program, the Partnership's systems are being evaluated
for meeting current and future business needs and the Partnership is using this
process as an opportunity to upgrade and enhance its information systems. The
Partnership anticipates completing such upgrades and replacements as needed by
September 1999. Since many systems are being modified to provide significantly
enhanced capabilities, the Year 2000 expenses have not been nor are planned to
be specifically tracked. The Partnership expects that most of these costs will
be capitalized, as they are principally related to adding new hardware and
software applications and functionality. Other costs will continue to be
expensed as incurred. Through September 1998, the Partnership estimates that
incremental costs of approximately $0.1 million
19
YEAR 2000 (CONTINUED)
have been incurred related to Year 2000 issues and its ongoing information
technology upgrade program. The current estimated cost to complete the upgrade
and remediation of non-compliant systems is expected to be less than $0.4
million.
The Partnership's current estimates of the amount of time and costs
necessary to remediate and test its computer systems are based on the facts and
circumstances existing at this time. The estimates were made using assumptions
of future events including the continued availability of existing resources,
Year 2000 modification plans, implementation success by third-parties and other
factors. New developments may occur that could affect the Partnership's
estimates of the amount of time and costs necessary to modify and test its IT
and non-IT systems for Year 2000 compliance. These developments include, but are
not limited to: the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes and equipment and the
planning and Year 2000 compliance success that key suppliers, vendors and
customers attain.
In addition the Partnership has anticipated the possibility that not
all of its vendors, suppliers and other third parties will have taken the
necessary steps to adequately address their Year 2000 issues on a timely basis.
In order to minimize the impact on the Partnership, of non-compliance, the
Partnership intends to contact all key suppliers and evaluate their Year 2000
readiness. If it is determined that these parties will not be Year 2000
compliant, the Partnership will prepare a contingency plan for those suppliers
whose non-compliance could have a material effect on the Partnership's business
activities.
ACCOUNTING PRINCIPLES NOT YET ADOPTED
The Financial Accounting Standards Board (the "FASB") issued Statement
of Financial Accounting Standards SFAS No. 131 - "Disclosure about Segments of
an Enterprise and Related Information." SFAS No. 131 requires disclosures about
segments of an enterprise and related information such as different types of
business activities and economic environments in which a business operates. This
statement is effective for fiscal years beginning after December 15, 1997.
Accordingly, the Partnership will not be required to adopt SFAS No. 131 until
fiscal 1999.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement is effective for fiscal
years beginning after June 15, 1999. SFAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities and
measure the instruments at fair value. The accounting for changes in fair value
of a derivative depends upon the intended use of such derivative. The
Partnership expects to adopt the provisions of SFAS 133 in first quarter of
fiscal 2000. The company is still evaluating the effects of SFAS 133.
The adoption of these standards is not expected to have a material
effect on the Partnership's financial position or results of operations.
STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE
This report includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act which
represent the Company's expectations or beliefs concerning future events that
involve risks and uncertainties, including those associated with the effect of
weather conditions on the company's financial performance, the price and supply
of propane and the ability of the Company to obtain new accounts and retain
existing accounts. All statements other than statements of historical facts
included in this Report including, without limitation, the statements under
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" and elsewhere herein, are forward-looking statements. Although the
Company believes that the expectations
20
STATEMENT REGARDING FORWARD LOOKING DISCLOSURE (CONTINUED)
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to have been correct.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The Partnership is exposed to interest rate risk primarily through its
Bank Credit facilities. The Partnership utilizes these borrowings to meet its
working capital needs and also to fund the short-term needs of its acquisition
program. As of September 30, 1998, the Partnership had outstanding borrowings of
approximately $9.0 million under the acquisition Facility and $4.8 million
outstanding under the Working Capital Facility. In the event that interest rates
associated with these facilities were to increase 100 basis points, the impact
on future cash flows would be approximately $0.1 million.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SEE INDEX TO FINANCIAL STATEMENTS PAGE F-1
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
NONE
PART III
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
PARTNERSHIP MANAGEMENT
The General Partner manages and operates the activities of the
Partnership. Unitholders do not directly or indirectly participate in the
management or operation of the Partnership. The General Partner owes a fiduciary
duty to the Unitholders. However, the Partnership agreement contains provisions
that allow the General Partner to take into account the interest of parties
other than the Limited Partners' in resolving conflict of interest, whereby
limiting such fiduciary duties. Notwithstanding any limitation on obligations or
duties, the General Partner will be liable, as the general partner of the
Partnership, for all debts of the Partnership (to the extent not paid by the
Partnership), except to the extent that indebtedness or other obligations
incurred by the Partnership are made specifically non-recourse to the General
Partner.
Elizabeth K. Lanier and William P. Nicoletti, who are neither officers
nor employees of the General Partner nor directors, officers or employees of any
affiliate of the General Partner, have been appointed to serve on the Audit
Committee of the General Partner's Board of Directors. The Audit Committee has
the authority to review, at the request of the General Partner, specific matters
as to which the General Partner believes there may be a conflict of interest in
order to determine if the resolution of such conflict proposed by the General
Partner is fair and reasonable to the Partnership. Any matters approved by the
Audit Committee will be conclusively deemed fair and reasonable to the
Partnership, approved by all partners of the Partnership and not a breach by the
General Partner of any duties it may owe the Partnership or the holders of
Common Units. In addition, the Audit Committee reviews the external financial
reporting of the Partnership, recommends engagement of the Partnership's
independent accountants and reviews the Partnership's procedures for internal
auditing and the adequacy of the Partnership's internal accounting controls.
With respect to the
21
PARTNERSHIP MANAGEMENT (CONTINUED)
additional matters, the Audit Committee may act on its own initiative to
question the General Partner and, absent the delegation of specific authority by
the entire Board of Directors, its recommendations will be advisory.
As is commonly the case with publicly traded limited partnerships, the
Partnership does not directly employ any of the persons responsible for managing
or operating the Partnership, except for certain employees of the Partnership's
wholly-owned subsidiary, Steller Propane Service Corp. The management and
workforce of Star Gas and certain employees of Petro manage and operate the
Partnership's business as officers and employees of the General Partner and its
Affiliates. See Item 1 - Business--Employees.
DIRECTORS AND EXECUTIVE OFFICERS OF THE GENERAL PARTNER
The following table sets forth certain information with respect to the directors
and executive officers of the General Partner. Executive officers and directors
are elected for one-year terms.
NAME AGE POSITION WITH THE GENERAL PARTNER
- ---- --- ---------------------------------
Irik P. Sevin/(a)//(b)//(c)/................................. 51 Chairman of the Board of Directors
Joseph P. Cavanaugh.......................................... 61 President and Chief Executive Officer
David R. Eastin.............................................. 40 Vice President-- Operations
Richard F. Ambury............................................ 41 Vice President-- Finance
Paul Biddelman/(c)/.......................................... 52 Director
Thomas J. Edelman............................................ 47 Director
Elizabeth K. Lanier/(d)/..................................... 47 Director
William P. Nicoletti/(d)/.................................... 53 Director
William G. Powers, Jr /(b)/.................................. 45 Director
Audrey L. Sevin.............................................. 72 Director and Secretary
Wolfgang Traber/(a)/......................................... 54 Director
- -----------------------------
(a) Member of the Compensation Committee
(b) Member of the Management Committee
(c) Member of the Distribution Committee
(d) Member of the Audit Committee
IRIK P. SEVIN has been the Chairman of the Board of Directors of Star Gas since
December 1993. Mr. Sevin has been a Director of Petro since its organization in
October 1979, and Chairman of the Board of Petro since January 1993. Mr. Sevin
has been President of Petro, Inc. since November 1979 and of Petro since 1983.
Mr. Sevin was an associate in the investment banking division of Kuhn Loeb & Co.
and then Lehman Brothers Kuhn Loeb Incorporated from February 1975 to December
1978.
JOSEPH P. CAVANAUGH serves as President and Chief Executive Officer of Star Gas.
Prior to December 1, 1997, he served as Senior Vice President of Safety and
Compliance for Petro. From October 1985 to January 1993, Mr. Cavanaugh was Vice
President and Controller of Petro. Prior to his current appointment, Mr.
Cavanaugh was active in the Partnership's management with the development of
safety/compliance programs, assisting with acquisitions and their subsequent
integration into the Partnership.
DAVID R. EASTIN serves as Vice President of Operations of Star Gas. Prior to
September 1995, he served as a Regional Manager and as the Director of
Operations--Eastern Area. Prior to joining Star Gas, he was employed by
Ferrellgas, Inc. from 1987 through 1992 and a predecessor company, Buckeye Gas
Products from 1980 through 1987, in a variety of operational capacities.
22
DIRECTORS AND EXECUTIVE OFFICERS OF THE GENERAL PARTNER (CONTINUED)
RICHARD F. AMBURY serves as Vice President of Finance of Star Gas. Prior to
joining Star Gas, he was employed by Petro from June 1983 through February 1996,
where he served in various accounting/finance capacities. From 1979 to 1983, Mr.
Ambury was employed by a predecessor firm of KPMG Peat Marwick LLP, a public
accounting firm.
PAUL BIDDELMAN, has been a Director of Star Gas since October 1995. He also
served in that capacity from December 1993 through June 1995. Mr. Biddelman has
been President of Hanseatic Corporation since December 1997, and was its
Treasurer and Senior Investment Officer from April 1992 to November 1997. Mr.
Biddelman joined Hanseatic from Clements Taee Biddelman Incorporated, a merchant
banking firm which he co-founded in 1991. From 1982 through 1990, he was a
Managing Director in Corporate Finance at Drexel Burnham Lambert Incorporated.
Mr. Biddelman also worked in corporate finance at Kuhn, Loeb & Co., from 1975 to
1979, and at Oppenheimer & Co., from 1979 to 1982. Mr. Biddelman is a director
of Celadon Group, Inc., Electronic Retailing Systems International, Inc.,
Institution Technologies, Inc. and Premier Parks, Inc.
THOMAS J. EDELMAN has been a Director of Star Gas since October 1995. He also
served in that capacity from December 1993 through June 1995. Mr. Edelman has
been a Director of Petro since its organization in October 1979. Mr. Edelman has
been Chairman of Patina Oil & Gas Corporation since its formation in May 1996.
Mr. Edelman also serves as Chairman of Range Resources Corporation. He co-
founded Snyder Oil Corporation and was its President and a Director from 1981
through February 1997. Prior to 1981, he was a Vice President of The First
Boston Corporation. Mr. Edelman serves as a Director of Paradise Music &
Entertainment, Inc. and as a Trustee of The Hotchkiss School.
ELIZABETH K. LANIER has been a Director of Star Gas since November 1995. Since
August 1998, Ms. Lanier has been Vice President and General Counsel for General
Electric Power Systems. From June 1996 until August 1998, Ms. Lanier was Vice
President and Chief of Staff for Cinergy Corp. Before joining Cinergy, Ms.
Lanier was a partner in the law firm of Frost & Jacobs in Cincinnati Ohio. From
1977 through 1982, she was associated with Davis Polk & Wardwell in New York,
New York. Ms. Lanier is also a Director of Patina Oil & Gas Corporation
WILLIAM P. NICOLETTI has been a Director of Star Gas since November 1995. Since
March 1998 he has been Co-Head of Energy Investment Banking and a Managing
Director of McDonald Investments Inc. Prior thereto, Mr. Nicoletti was Managing
Director of Nicoletti & Company Inc., a private investment bank servicing
clients in energy-related industries. From 1988 through 1990, he was a Managing
Director and head of the Energy and Natural Resources Group of Paine Webber
Incorporated. From 1969 through 1987, he was with E.F. Hutton & Company Inc.,
where from 1980 through 1987 he was a Senior Vice President and head of the
Energy and Natural Resources Group. Mr. Nicoletti is also a Director of
StatesRail, Inc.
WILLIAM G. POWERS, JR. has been President of Petro since December 1, 1997. From
December 1993 to November 1997, Mr. Powers was President and Chief Executive
Officer of Star Gas. Prior to joining Star Gas, he was employed by Petro from
1984 to 1993 where he served in various capacities, including Regional
Operations Manager and Vice President of Acquisitions. From 1977 to 1983, he was
employed by The Augsbury Corporation, a company engaged in the wholesale and
retail distribution of fuel oil and gasoline throughout New York and New England
and served as Vice President of Marketing and Operations.
AUDREY L. SEVIN has been a Director of Star Gas since December 1993 and the
Secretary of Star Gas since June 1994. Mrs. Sevin has been a Director and
Secretary of Petro since its organization in October 1979. Mrs. Sevin was a
Director, executive officer and principal shareholder of A. W. Fuel Co., Inc.
from 1952 until its purchase by Petro in May 1981.
23
DIRECTORS AND EXECUTIVE OFFICERS OF THE GENERAL PARTNER (CONTINUED)
WOLFGANG TRABER has been a Director of Star Gas since October 1995. He also
served in that capacity from December 1993 through June 1995. Mr. Traber has
been a Director of Petro since its organization in October 1979. Mr. Traber is
Chairman of the Board of Hanseatic Corporation, a private investment corporation
in New York, New York. Mr. Traber is a Director of Deltec Asset Management
Corporation, Blue Ridge Real Estate Company, and M.M. Warburg & Co.
Audrey Sevin is the mother of Irik P. Sevin. There are no other familial
relationships between any of the directors and executive officers. Elizabeth K.
Lanier will withdraw as a director upon consummation of the Star Gas/Petro
transaction as a result of additional duties associated with a new position. She
will be replaced by a director selected by the Star Gas LLC, Board and the new
director will not be an officer or employee of Star Gas LLC, or any of its
affiliates.
MEETINGS AND COMPENSATION OF DIRECTORS
During fiscal 1998, the Board of Directors met four times. All
Directors attended each meeting. Star Gas pays each director including the
chairman, an annual fee of $17,500. Members of the audit committee receive an
additional $5,000 per annum.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company's Board of Directors has an Audit Committee, a Compensation
Committee, a Distribution Committee and a Management Committee. The members of
each committee are appointed by the Board of Directors for a one-year term and
until their respective successors are elected.
In connection with the Partnership's decision to explore the
possibility of a business combination with Petro, the Board of Directors
appointed a special committee to review the proposed Petro/Star transaction. Ms.
Lanier and Mr. Nicoletti received $40,000 each in compensation for serving on
this committee.
AUDIT COMMITTEE
The duties of the Audit Committee are described above under
"Partnership Management".
The members of the Audit Committee are Elizabeth K. Lanier and William
P. Nicoletti. Members of the Audit Committee may not be employees of the
Company.
COMPENSATION COMMITTEE
The duties of the Compensation Committee are (i) to determine the
annual salary, bonus and other benefits, direct and indirect, of any and all
named executive officers (as defined under Regulation S-K promulgated by the
Securities and Exchange Commission), (ii) to review and recommend to the full
Board any and all matters related to benefit plans covering the foregoing
officers and any other employees and (iii) to administer the Partnership's Unit
Option Plan as the Option Committee thereunder. The members of the Compensation
Committee are Wolfgang Traber and Irik P. Sevin.
24
REIMBURSEMENT OF EXPENSES OF THE GENERAL PARTNER
The General Partner does not receive any management fee or other
compensation in connection with its management of the Partnership. The General
Partner is reimbursed at cost for all expenses incurred on behalf of the
Partnership, including the costs of compensation described herein properly
allocable to the Partnership, and all other expenses necessary or appropriate to
the conduct of the business of, and allocable to, the Partnership.
The Partnership Agreement provides that the General Partner shall
determine the expenses that are allocable to the Partnership in any reasonable
manner determined by the General Partner in its sole discretion. Affiliates of
the General Partner, including Petro, perform certain management and acquisition
services for the General Partner on behalf of the Partnership. Such affiliates
do not receive a fee for such services, but are reimbursed for all direct and
indirect expenses incurred in connection therewith. The audit committee approved
the allocation of expenses by Petro to the Partnership for fiscal 1998.
In addition, the General Partner owns 2,396,078 subordinated units and
60,727 common units of the Partnership and is entitled to receive distributions
on such Units and the General Partner is entitled to incentive distributions in
respect of its general partner interest.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the annual salary, bonuses and all other
compensation awards and payouts to the President and Chief Executive Officer and
to certain named executive officers of the General Partner for services rendered
to Star Gas and its subsidiaries during the fiscal years ended September 30,
1998, 1997 and 1996.
SUMMARY COMPENSATION TABLE
OTHER
ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
--------------------------- ---- ------ ----- ------------
Joseph P. Cavanaugh, President and Chief Executive Officer 1998 $181,262/(1)/ - $ 14,076/(2)/
William G. Powers, Jr, President and Chief Executive Officer 1998 $ 37,500/(3)/ - -
Irik P. Sevin, Chairman 1998 $150,000 - -
Richard F. Ambury, Vice President - Finance 1998 $150,000 $ 37,500 $ 26,032/(2)/
1997 $143,000 $ 35,750 $ 20,408/(2)/
1996 $ 99,667/(4)/ $ 25,000 -
David R. Eastin, Vice President - Operations 1998 $132,500 $ 33,125 $ 4,777/(5)/
1997 $120,826 $ 30,000 $ 3,214/(5)/
1996 $106,826 $ 26,707 $ 9,292/(6)/
(1) Mr. Cavanaugh joined Star Gas on December 1, 1997.
(2) Represents amounts paid in lieu of contribution under Star Gas' 401(k)
plan.
(3) Mr. Powers left Star Gas on November 30, 1997 and assumed the position of
President and Chief Operating Officer of Petro.
(4) Mr. Ambury joined Star Gas on February 1, 1996.
(5) Represents matching contributions paid to Star Gas' 401(k) plan.
(6) Represents a $7,570 relocation allowance and Star Gas' matching
contribution to Mr. Eastin's 401(k) retirement plan of $1,722.
25
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
NUMBER OF UNEXERCISED OPTIONS AT
SEPTEMBER 30, 1998 VALUE OF IN THE MONEY OPTIONS
NAME EXERCISABLE(E)/UNEXERCISABLE(U) AT SEPTEMBER 30, 1998/(1)/
- ---- ------------------------------- --------------------------
William G. Powers, Jr. 30,000 (U) $ -
David R. Eastin 10,000 (U) $ -
(1) Values are calculated by deducting the exercise price from the fair market
value of the common units as of September 30, 1998.
OPTIONS GRANTED IN LAST FISCAL YEAR
None.
UNIT OPTION PLAN
In December 1995, the General Partner adopted the 1995 Star Gas Corporation
Unit Option Plan (the "Unit Option Plan"), which currently authorizes the
issuance of options (the "Unit Options") and Unit Appreciation Rights ("UARS")
covering up to 300,000 Subordinated Units to certain officers and employees of
the General Partner. A total of 40,000 options were granted to key executives
in December 1995. The Unit Options have the following characteristics: 1)
exercise price of $22 per unit, which is an estimate of the fair market value of
the Subordinated Units at the time of grant, 2) vest over five year period, 3)
exercisable after January 12, 2001, assuming the lapse of the subordination
period and 4) expire on the tenth anniversary of the date of grant. Upon
conversion of the Subordinated Units held by the General Partner and its
affiliates, the Unit Options granted will convert to Common Unit Options.
401(K) PLAN
The Star Gas Corporation Employee Savings Plan is a voluntary defined
contribution plan covering non-union and union employees who have attained the
age of 21 and who have completed one year of service. Participants in the plan
may elect to contribute a sum not to exceed 15% of a participant's compensation.
For non-union employees, the Company contributes a matching amount equaling the
participant's contribution not to exceed 3% of the participant's compensation.
In addition, the plan allows the Company to contribute an additional
discretionary amount, which will be allocated to each participant based on such
participant's compensation as a percentage of total compensation of all
participants.
26
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
OWNERSHIP OF COMMON AND SUBORDINATED UNITS
The following table sets forth certain information as of November 23, 1998
regarding the beneficial ownership of the Common and Subordinated Units of the
Partnership by certain beneficial owners and all directors of the General
Partner, each of the named executive officers and all directors and executive
officers as a group. The General Partner knows of no person beneficially owning
more than 5% of the Common Units.
UNITS
NAME AND ADDRESS OF BENEFICIALLY PERCENT OF
TITLE OF CLASS BENEFICIAL OWNER OWNED CLASS
- -------------- --------------- ----- -----
Common Units Richard F. Ambury/(1)/ 625 --
Common Units Wolfgang Traber/(1)//(2)/ 10,400/(2)/ 0.3%
Common Units Star Gas Corporation/(1)/ 60,727 1.6%
Subordinated Units Star Gas Corporation/(1)/ 2,396,078 100.0%
All officers and directors
as a group (2 persons) Star Gas Corporation/(1)/ 11,025 0.3%
(1) The address of such person is care of the Partnership at 2187 Atlantic
Street, Stamford, CT 06902.
(2) Includes 10,000 Common Units owned by Mr. Traber's wife and 400 Common Units
owned by Mr. Traber's daughter as to which he may be deemed to share
beneficial ownership.
27
OWNERSHIP OF PETRO COMMON STOCK BY THE DIRECTORS AND EXECUTIVE OFFICERS OF THE
GENERAL PARTNER
The table below sets forth as of November 23, 1998, the beneficial
ownership of Petro Common Stock by each director and each named executive
officer of the General Partner, as well as the directors and all of the
executive officers of the General Partner as a group. The total shares
beneficially owned by the directors and executive officers as a group represent
21.08% of Petro's outstanding Class A Common Stock and 54.47% of Petro's
outstanding Class C Common Stock. Each share of Class A Common Stock is entitled
to one vote and each share of Class C Common Stock is entitled to 10 votes, but
otherwise the two classes have the same rights. Petro's Class A Common Stock is
traded on the NASDAQ National Market (Symbol: HEAT).
NUMBER OF SHARES/(1)/ PERCENT OF TOTAL PERCENTAGE OF TOTAL
---------------------------------- ---------------------- ---------------------
NAME CLASS A CLASS C CLASS A CLASS C VOTING POWER/(2)/
- ---------------------------------------- ------- ------- ------- ------- -----------------
Audrey L. Sevin /(3)/................... 1,876,863 477,716 7.83% 18.39% 13.32%
Irik P. Sevin /(3)/..................... 740,438 /(4)/ 201,641 3.09% 7.76% 5.52%
Wolfgang Traber /(4)/................... 1,777,279 /(5)/ 606,472 /(6)/ 7.42% 23.35% 15.70%
Thomas J. Edelman /(3)/................. 653,312 /(7)/ 129,019 2.73% 4.97% 3.89%
Paul Biddelman / (4)/................... 1,779,665 /(5)/ 597,434 /(6)/ 7.43% 23.00% 15.53%
Joesph P. Cavanaugh/(3)/................ 860 - - - -
Richard F. Ambury /(3)/................. 345 - - - -
David R. Eastin /(3)/................... - - - - -
Elizabeth K. Lanier /(8)/............... - - - - -
William P. Nicoletti /(9)/.............. - - - - -
All officers and directors as a
group (11 persons)................... 5,051,483 1,414,848 21.08% 54.47% 38.45%
(1) For purposes of this table, a person or group is deemed to have "beneficial
ownership" of any shares, which such person has the right to acquire within
60 days after November 23, 1998. For purposes of calculating the percentage
of outstanding shares held by each person named above, any shares which such
person has the right to acquire within 60 days after November 23, 1998 are
deemed to be outstanding, but not for the purpose of calculating the
percentage ownership of any other person.
(2) Total voting power means the total voting power of all shares of Class A
Common Stock and Class C Common Stock. This column reflects the percentage
of total voting power represented by all shares of Class A Common Stock and
Class C Common Stock held by the named persons.
(3) The address of such person is c/o the Partnership at 2187 Atlantic Street,
Stamford, CT 06902.
(4) The address of such person is 450 Park Avenue, New York, NY 10022.
(5) Includes 1,777,279 shares held by Hanseatic Americas LDC, a Bahamian limited
duration company in which the sole managing member is Hansabel Partners,
LLC, a Delaware limited liability company in which the sole managing member
is Hanseatic Corporation, a New York corporation ("Hanseatic"). Messrs.
Traber and Biddelman are executive officers of Hanseatic and Mr. Traber
holds in excess of a majority of the shares of capital stock of Hanseatic.
(6) Includes 298,717 shares owned by each of Hanseatic and Tortosa
Vermogensverwaltungsgesellschaft gmbh ("Tortosa"), a German corporation
owned and controlled by Hubertus Langen, and as to which Hanseatic and
Tortosa each hold shared voting power.
(7) Includes 76,000 shares of Class A Common Stock owned by Mr. Edelman's wife
and minor children.
(8) The address of such person is Bldg., 37-6, 1 River Rd., Schenectady, NY
12345
(9) The address of such person is One Evertrust Plaza, Jersey City, NJ 07302
Section 16(a) of the Securities Exchange Act of 1934 requires the General
Partner's officers and directors, and persons who own more than 10% of a
registered class of the Partnership's equity securities, to file reports of
beneficial ownership and changes in beneficial ownership with the Securities and
Exchange Commission ("SEC"). Officers, directors and greater than 10 percent
unitholders are required by SEC regulation to furnish the General Partner with
copies of all Section 16(a) forms.
Based solely on its review of the copies of such forms received by the
General Partner, or written representations from certain reporting persons that
no Form 5's were required for those persons, the General Partner believes that
during fiscal year 1998 all filing requirements applicable to its officers,
directors, and greater than 10 percent beneficial owners were met in a timely
manner.
28
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Partnership and the General Partner have certain ongoing relationships
with Petro and its affiliates. Affiliates of the General Partner, including
Petro, perform certain administrative services for the General Partner on behalf
of the Partnership. Such affiliates do not receive a fee for such services, but
are reimbursed for all direct and indirect expenses incurred in connection
therewith.
For fiscal 1998, the Partnership reimbursed the General Partner $19.5 million
representing salary, payroll tax and other compensation paid to the employees of
the General Partner and paid $0.1 million to Petro for corporate services such
as compliance and supply. In addition, the Partnership has reimbursed Petro for
$0.8 million relating to the Partnership's share of the costs incurred by Petro
in conducting the operations of a certain shared branch location which includes
managerial services.
Prior to Petro's acquisition of Star Gas, Star Gas engaged Nicoletti &
Company Inc., an investment banking firm owned by William P. Nicoletti, who is
now a Director of the General Partner, to perform certain investment banking
services for Star Gas. Pursuant to such engagement, Star Gas paid Nicoletti &
Company Inc. fees of $40,000, $521,500 and $81,600 for services rendered during
1992, 1993 and 1994, respectively. In 1995, Star Gas paid Nicoletti & Company
Inc. $20,000 in advisory fees in connection with a proposed acquisition. In
1997, Star Gas paid Mr. Nicoletti $20,000 for serving on the Board of Directors
Special Committee which explored the possible sale or merger of the Partnership.
In 1998, Star Gas paid Mr. Nicoletti $40,000 for serving on the Board of
Directors Special Committee which explored the business combination with Petro.
Elizabeth K. Lanier, a Director of the General Partner, was a partner in the
law firm of Frost & Jacobs, in Cincinnati, Ohio until June 1996. Frost & Jacobs
has acted as counsel to Star Gas in connection with certain litigation matters.
In 1997, Star Gas paid Ms. Lanier $20,000 for serving on the Board of Directors
Special Committee which explored the possible sale or merger of the Partnership.
In 1998, Star Gas paid Ms. Lanier $40,000 for serving on the Board of Directors
Special Committee which explored the business combination with Petro.
In 1993 Star Gas paid an aggregate of $50,000 in advisory fees to Warwick
Energy Advisors, Inc. (Warwick), a company controlled by Thomas Edelman, now a
Director of the General Partner and Petro. In 1993, Petro paid Warwick and Mr.
Edelman an aggregate of $211,500 in advisory fees in connection with Petro's
acquisition of Star Gas. In 1994, Petro paid Mr. Edelman an additional $248,500
in such fees. In 1995, Petro paid Mr. Edelman $20,000 in advisory fees in
connection with a proposed acquisition by Star Gas.
29
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
See "Index to Consolidated Financial Statements and Financial
Statement Schedule" set forth on page F-1.
2. Financial Statement Schedule.
See "Index to Consolidated Financial Statements and Financial
Schedule" set forth on page F-1.
3. Exhibits.
See "Index to Exhibits" set forth on page 31.
(b) Reports on Form 8-K.
The Partnership did not file a Form 8-K during the quarter ended
September 30, 1998.
30
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------
3.1 Form of Agreement of Limited Partnership of Star Gas Partners, L.P.(2)
3.2 Form of Agreement of Limited Partnership of Star Gas Propane, L.P.(2)
5.1 Opinion of Phillips Nizer Benjamin Krim & Ballon LLP as to the legality of the securities being registered (7)
8.1 Opinion of Phillips Nizer Benjamin Krim & Ballon LLP relating to tax matters (7)
10.1 Form of Credit Agreement among Star Gas Propane, L.P. and certain banks(3)
10.2 Form of Conveyance and Contribution Agreement among Star Gas Corporation, the Partnership and the Operating
Partnership.(3)
10.3 Form of First Mortgage Note Agreement among certain insurance companies, Star Gas Corporation and Star Gas
Propane L.P.(3)
10.4 Intercompany Debt(3)
10.5 Form of Non-competition Agreement between Petro and the Partnership(3)
10.6 Form of Star Gas Corporation 1995 Unit Option Plan(3)
10.7 Amoco Supply Contract(3)
10.8 Stock Purchase Agreement dated October 20, 1997 with respect to the Pearl Gas Acquisition(4)
10.9 Conveyance and Contribution Agreement with respect to the Pearl Gas Acquisition(4)
10.10 Second Amendment dated as of October 21, 1997 to the Credit Agreement dated as of December 13, 1995 among
the Operating Partnership, Bank Boston, N.A. and NationsBank, N.A.(4)
10.11 Note Agreement, dated as of January 22, 1998, by and between Star Gas and The Northwestern Mutual Life
Insurance Company(6)
10.12 Third Amendment dated April 15, 1998 to the Bank Credit Agreement (8)
10.13 Fourth Amendment dated November 3, 1998 to the Bank Credit Agreement (1)
10.14 Agreement and Plan of Merger by and among Petroleum Heat and Power Co., Inc., Star Gas Partners, L.P.,
Petro/Mergeco, Inc., and Star Gas Propane, L.P. (9)
10.15 Exchange Agreement (9)
21 Subsidiaries of the Registrant(5)
23.1 Consent of KPMG Peat Marwick LLP(1)
23.2 Consent of Phillips Nizer Benjamin Krim & Ballon LLP (included in Exhibit 5.1)(7)
24.1 Powers of Attorney (7)
27.0 Financial Data Schedule (1)
________________
(1) Filed herewith.
(2) Incorporated by reference to Appendix A to the Prospectus filed as
part of Registrant's Registration Statement on Form S-1 File No. 33-
90496.
(3) Incorporated by reference to the same Exhibit to Registrant's
Registration Statement on Form S-1, File No. 33-98490, filed with the
Commission on December 13, 1995.
(4) Incorporated by reference to the same Exhibit to Registrant's Periodic
Report on Form 8-K, as amended, as filed with the Commission on
October 23 and 29, 1997.
(5) Incorporated by reference to the same Exhibit to Registrant's
Registration Statement on Form S-1, File No. 333-40855, filed with the
Commission on December 11, 1997
(6) Incorporated by reference to the same Exhibit to Registrant's
Registration Statement on Form S-3, File No. 333-47295, filed with the
Commission March 4, 1998.
(7) Incorporated by reference to the same Exhibit to Registrant's
Statement on Form S-4, File No. 333-49751, filed with the Commission
on April 9, 1998
(8) Incorporated by reference to the same Exhibit to Registrant's
Quarterly Report on Form 10-Q, filed with the Commission on May 7,
1998
(9) Incorporated by reference to the Appendix to Registrant's Registration
Statement on form S-1 File No. 333-66005, filed with the Commission on
October 22, 1998
31
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized:
Star Gas Partners, L.P.
By: Star Gas Corporation (General Partner)
Joseph P. Cavanaugh
----------------------------------------
By: /s/ Joseph P. Cavanaugh
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons in the capacities and on the date
indicated:
Signature Title Date
- --------- ----- ----
/s/Joseph P. Cavanaugh President November 24, 1998
- ----------------------------------------------- Star Gas Corporation
Joseph P. Cavanaugh (Principal Executive Officer)
/s/Richard F. Ambury Vice President - Finance November 24, 1998
- ----------------------------------------------- Star Gas Corporation
Richard F. Ambury (Principal Financial and Accounting Officer)
/s/Irik P. Sevin Director November 24, 1998
- ----------------------------------------------- Star Gas Corporation
Irik P. Sevin
Director November 24, 1998
- ------------------------------------------------ Star Gas Corporation
Audrey L. Sevin
/s/William P. Nicoletti Director November 24, 1998
- ----------------------------------------------- Star Gas Corporation
William P. Nicoletti
/s/Elizabeth K. Lanier Director November 24, 1998
- ----------------------------------------------- Star Gas Corporation
Elizabeth K. Lanier
/s/Paul Biddelman Director November 24, 1998
- ----------------------------------------------- Star Gas Corporation
Paul Biddelman
/s/Thomas J. Edelman Director November 24, 1998
- ----------------------------------------------- Star Gas Corporation
Thomas J. Edelman
/s/Wolfgang Traber Director November 24, 1998
- ----------------------------------------------- Star Gas Corporation
Wolfgang Traber
/s/William G. Powers, Jr.. Director November 24, 1998
- ----------------------------------------------- Star Gas Corporation
William G. Powers, Jr.
32
STAR GAS PARTNERS, L.P. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
PAGE
----
PART II FINANCIAL INFORMATION:
Item 8 - Financial Statements
Star Gas Partners, L.P. and Subsidiary and the Predecessor Company
------------------------------------------------------------------
Independent Auditors' Report..........................................F-2
Consolidated Balance Sheets as of September 30, 1997 and 1998.........F-3
Consolidated Statements of Operations from October 1, 1995
through December 20, 1995 (Predecessor), December 20, 1995
through September 30, 1996 and the years ended September 30,
1997 and 1998.........................................................F-4
Consolidated Statement of Predecessor Equity for the period October
1, 1995 through December 20, 1995 and the consolidated Statement
of Partners' Capital for the period December 20, 1995 through
September 30, 1996 and the years ended September 30,
1997 and 1998.........................................................F-5
Consolidated Statements of Cash Flows from October 1, 1995
through December 20, 1995 (Predecessor), December 20, 1995
through September 30, 1996 and the years ended September 30,
1997 and 1998.........................................................F-6
Notes to Consolidated Financial Statements............................F-7 - F-19
Schedules for the years ended September 30, 1996, 1997 and 1998
II. Valuation and Qualifying Accounts..........................F-20
All other schedules are omitted because they are not
applicable or the required information is shown in the
consolidated financial statements or the notes therein.
F-1
STAR GAS PARTNERS, L.P. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
INDEPENDENT AUDITORS' REPORT
The Partners of Star Gas Partners, L.P.:
We have audited the consolidated financial statements of Star Gas
Partners, L.P. and Subsidiary as listed in the accompanying index. In
connection with our audits of the consolidated financial statements,
we have also audited the financial statement schedule as listed in the
accompanying index. These consolidated financial statements and
financial statement schedule are the responsibility of the
Partnership's management. Our responsibility is to express an opinion
on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above, present fairly, in all material respects, the financial
position of Star Gas Partners, L.P. and Subsidiary as of September 30,
1997 and 1998 and the results of their operations and their cash flows
for each of the years in the three-year period ended September 30,
1998, in conformity with generally accepted accounting principles.
Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly, in all material respects, the
information set forth therein.
Stamford, Connecticut KPMG Peat Marwick LLP
November 13, 1998
F-2
STAR GAS PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 30, SEPTEMBER 30,
1997 1998
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 889 $ 1,115
Receivables, net of allowance of $273
and $252, respectively 5,720 5,279
Inventories 6,597 10,608
Prepaid expenses and other current assets 959 945
---------- ----------
Total current assets 14,165 17,947
---------- ----------
Property and equipment, net 95,282 110,262
Intangibles and other assets, net 38,022 51,398
---------- ----------
Total assets $ 147,469 $ 179,607
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities:
Accounts payable $ 3,178 $ 3,097
Bank credit facility borrowings - 4,770
Current maturities of long-term debt - 692
Accrued expenses 3,004 2,830
Accrued interest 321 485
Customer credit balances 4,343 6,038
---------- ----------
Total current liabilities 10,846 17,912
---------- ----------
Long-term debt 85,000 104,308
Other long-term liabilities 45 40
Partners' Capital:
Common unitholders 47,573 58,686
Subordinated unitholder 4,034 (1,446)
General partner (29) 107
---------- ----------
Total Partners' Capital 51,578 57,347
---------- ----------
Total Liabilities and Partners' Capital $ 147,469 $ 179,607
========== ==========
See accompanying notes to consolidated financial statements.
F-3
STAR GAS PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
OCTOBER 1, OCTOBER 1,
1995 DECEMBER 20, 1995
THROUGH 1995 THROUGH
DECEMBER 20, THROUGH SEPTEMBER 30, YEAR ENDED YEAR ENDED
1995 SEPTEMBER 30, 1996 SEPTEMBER 30, SEPTEMBER 30,
(PREDECESSOR) 1996 (COMBINED) 1997 1998
------------- ------------- ------------- ------------- -------------
Sales
Cost of sales $ 28,159 $ 91,475 $ 119,634 $ 135,159 $ 111,685
Gross profit 12,808 45,749 58,557 72,211 49,498
-------- -------- --------- --------- ---------
15,351 45,726 61,077 62,948 62,187
Delivery and branch expenses 7,729 27,021 34,750 36,427 37,216
Depreciation and amortization 2,177 7,631 9,808 10,405 11,638
General and administrative 1,349 5,108 6,457 6,818 6,065
Net (loss) on sales of assets (113) (147) (260) (295) (271)
-------- -------- --------- --------- ---------
Operating income 3,983 5,819 9,802 9,003 6,997
Interest expense, net 1,922 5,202 7,124 6,966 7,927
-------- -------- --------- --------- ---------
Income (loss) before income taxes 2,061 617 2,678 2,037 (930)
Income tax expense 60 25 85 25 25
-------- -------- --------- --------- ---------
Net income (loss) $ 2,001 $ 592 $ 2,593 $ 2,012 $ (955)
======== ======== ========= ========= =========
General Partner's interest in net $ 12 $ 40 $ (19)
income (loss) -------- --------- ---------
Limited Partners' interest in net $ 580 $ 1,972 $ (936)
income (loss) ======== ========= =========
Basic and diluted, net income (loss)
per Limited Partner unit $ 0.11 $ 0.37 $ (0.16)
======== ========= =========
Weighted average number of Limited
Partner units outstanding 5,271 5,271 6,035
======== ========= =========
See accompanying notes to consolidated financial statements.
F-4
STAR GAS PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL AND PREDECESSOR EQUITY
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
PREDECESSOR'S EQUITY
THE PERIOD OCTOBER 1, 1995 THROUGH DECEMBER 20, 1995
8% TOTAL
CUMULATIVE 12.5% CAPITAL IN PREDECESSOR'S
PREFERRED PREFERRED EXCESS OF EQUITY
STOCK STOCK PAR VALUE DEFICIT (DEFICIENCY)
---------- ----------- ----------- ----------- -------------
Balance as of September 30, 1995 $ 189 $ 319 $ 51,703 $ (7,906) $ 44,305
Dividends (21,309) (21,309)
Additional capital contribution - - 4,184 - 4,184
Net income - - - 2,001 2,001
-------- -------- -------- -------- --------
Balance as of December 30, 1995 $ 189 $ 319 $ 55,887 $(27,214) $ 29,181
======== ======== ======== ======== ========
PARTNERS' CAPITAL
FOR THE PERIOD ENDED DECEMBER 20, 1995 THROUGH SEPTEMBER 30, 1996
AND THE YEARS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1998
NUMBER OF UNITS TOTAL
--------------- GENERAL PARTNERS'
COMMON SUBORDINATED COMMON SUBORDINATED PARTNER CAPITAL
---------- -------------- ---------- -------------- ----------- -----------
Balance as of December 20, 1995 - - $ - $ - $ - $ -
Contribution of assets, net - 2,396 - 10,956 225 11,181
Issuance of Common Units, net 2,875 - 55,875 - 56 55,931
Net Income - - 317 263 12 592
Distributions ($1.17 per unit) - - (3,371) (2,809) (126) (6,306)
-------- -------- -------- -------- -------- --------
Balance as of September 30, 1996 2,875 2,396 52,821 8,410 167 61,398
-------- -------- -------- -------- -------- --------
Net Income - - 1,077 895 40 2,012
Distributions ($2.20 per unit) - - (6,325) (5,271) (236) (11,832)
-------- -------- -------- -------- -------- --------
Balance as of September 30, 1997 2,875 2,396 47,573 4,034 (29) 51,578
-------- -------- -------- -------- -------- --------
Contribution of assets, net 148 - 3,399 - 68 3,467
Issuance of Common Units, net 809 - 15,745 - 344 16,089
Issuance of Common Units in
connection with acquisition 27 - 600 - 12 612
Net loss - - (728) (208) (19) (955)
Distributions ($2.20 per unit) - - (7,903) (5,272) (269) (13,444)
-------- -------- -------- -------- -------- --------
Balance as of September 30, 1998 3,859 2,396 $ 58,686 $ (1,446) $ 107 $ 57,347
======== ======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
F-5
STAR GAS PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
OCTOBER 1, 1995 OCTOBER 1, 1995
THROUGH DECEMBER 20, 1995 THROUGH
DECEMBER 20, 1995 THROUGH SEPTEMBER 30, 1996
(PREDECESSOR) SEPTEMBER 30, 1996 (COMBINED)
----------------------- --------------------- --------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,001 $ 592 $ 2,593
Adjustments to reconcile net income (loss)
to net cash provided by
Operating activities:
Depreciation and amortization 2,177 7,631 9,808
Provision for losses on accounts receivable 101 321 422
Net loss on sales of assets 113 147 260
Changes in operating assets and liabilities:
Decrease (increase) in receivables (2,779) 1,766 (1,013)
Decrease (increase) in inventories 1,430 (3,770) (2,340)
Decrease (increase) in prepaid and other assets (455) 754 299
Increase (decrease) in other current liabilities (1,703) 1,757 54
Increase (decrease) in other long-term liabilities (12) (89) (101)
-------- -------- --------
Net cash provided by operating activities 873 9,109 9,982
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,617) (3,715) (5,332)
Business acquisitions - (2,440) (2,440)
Proceeds from sales of fixed assets 566 252 818
Cash acquired in conveyance - - -
-------- -------- --------
Net cash provided by (used in) investing activities (1,051) (5,903) (6,954)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Credit facility borrowings - 5,850 5,850
Credit facility repayments - (3,500) (3,500)
Acquisition facility borrowings - - -
Acquisition facility repayments - - -
Repayments of debt (35,783) (53,780) (89,563)
Repayments of preferred stock (8,625) - (8,625)
Cash dividends paid (21,309) - (21,309)
Distributions - (6,306) (6,306)
Loan to Petro (12,000) - (12,000)
Proceeds from issuance of First Mortgage Notes 85,000 - 85,000
Proceeds from issuance of Common Units, net - 55,931 55,931
Debt placement and credit agreement expenses (1,313) (814) (2,127)
Cash retained by general partner (6,000) - (6,000)
-------- -------- --------
Net cash provided by (used in) financing activities (30) (2,619) (2,649)
-------- -------- --------
Net increase (decrease) in cash (208) 587 379
Cash at beginning of period 727 519 727
-------- -------- --------
Cash at end of period $ 519 $ 1,106 $ 1,106
======== ======== ========
YEAR ENDED YEAR ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1998
------------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,012 $ (955)
Adjustments to reconcile net income (loss)
to net cash provided by
Operating activities:
Depreciation and amortization 10,405 11,638
Provision for losses on accounts receivable 312 239
Net loss on sales of assets 295 271
Changes in operating assets and liabilities:
Decrease (increase) in receivables 1,193 342
Decrease (increase) in inventories 1,897 (3,705)
Decrease (increase) in prepaid and other assets 124 198
Increase (decrease) in other current liabilities 2,900 1,241
Increase (decrease) in other long-term liabilities (174) (5)
-------- --------
Net cash provided by operating activities 18,964 9,264
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (5,279) (5,015)
Business acquisitions - (10,401)
Proceeds from sales of fixed assets 374 315
Cash acquired in conveyance - 1,825
-------- --------
Net cash provided by (used in) investing activities (4,905) (13,276)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Credit facility borrowings 5,000 20,300
Credit facility repayments (7,350) (15,530)
Acquisition facility borrowings 3,350 30,000
Acquisition facility repayments (3,350) (21,000)
Repayments of debt - (23,000)
Repayments of preferred stock - -
Cash dividends paid - -
Distributions (11,832) (13,444)
Loan to Petro - -
Proceeds from issuance of First Mortgage Notes - 11,000
Proceeds from issuance of Common Units, net - 16,089
Debt placement and credit agreement expenses (94) (177)
Cash retained by general partner - -
-------- --------
Net cash provided by (used in) financing activities (14,276) 4,238
-------- --------
Net increase (decrease) in cash (217) 226
Cash at beginning of period 1,106 889
-------- --------
Cash at end of period $ 889 $ 1,115
======== ========
See accompanying notes to consolidated financial statements.
F-6
STAR GAS PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER UNIT DATA)
1) PARTNERSHIP ORGANIZATION AND FORMATION
Star Gas Partners, L.P. ("Star Gas Partners" or the "Partnership") was
formed on October 16, 1995, as a Delaware limited partnership. Star Gas
Partners and its subsidiary, Star Gas Propane, L.P., a Delaware limited
partnership (the "Operating Partnership" or the "OLP") were formed to
acquire, own and operate substantially all of the propane operations and
assets and liabilities of Star Gas Corporation ("Star Gas"), a Delaware
corporation (and the general partner of Star Gas Partners and the Operating
Partnership) and the propane operations and assets and liabilities of Star
Gas' parent corporation, Petroleum Heat and Power Co., Inc., a Minnesota
corporation ("Petro") (collectively hereinafter referred to as the
"Predecessor Company"). The Operating Partnership is, and the Predecessor
Company was, engaged in the marketing and distribution of propane gas and
related appliances to retail and wholesale customers in the United States
located principally in the Midwest and Northeast. On December 20, 1995,
(i) Petro conveyed all of its propane assets and related liabilities to
Star Gas and (ii) Star Gas and its subsidiaries conveyed substantially all
of their assets (other than $83.7 million in cash from the proceeds of the
First Mortgage Notes and certain non-operating assets) to the Operating
Partnership (the "Star Gas Conveyance") in exchange for general and limited
partner interests in the Operating Partnership and the assumption by the
Operating Partnership of substantially all of the liabilities of Star Gas
and its subsidiaries (excluding certain income tax liabilities and certain
other long-term obligations of Star Gas that were assumed by Petro),
including the First Mortgage Notes and approximately $53.8 million in
outstanding Star Gas debt due to Petro. The net book value of the assets
contributed by Star Gas and its subsidiaries to the Operating Partnership
exceeded the liabilities assumed by $11.2 million. Immediately after the
Star Gas Conveyance, Star Gas and its subsidiaries conveyed their limited
partner interests in the Operating Partnership to Star Gas Partners in
exchange for an aggregate of 2.4 million Subordinated Units of limited
partner interests in Star Gas Partners.
Of the $83.7 million in cash retained by the General Partner, $35.8
million was paid to Petro in satisfaction of additional indebtedness, $8.6
million was used to redeem preferred stock of the General Partner held by
Petro, $12.0 million was loaned to Petro, and $6.0 million was retained to
be available to fund the General Partner's additional capital contribution
obligation. The remaining $21.3 million was paid to Petro as dividends.
During fiscal 1996, Star Gas Partners completed its initial public
offering of 2.9 million Common Units, including 0.3 million Common Units
pursuant to an over-allotment option, at a price of $22.00 per unit. The
net proceeds received of $55.9 million, after deducting underwriting
discounts, commissions and expenses were contributed to the Operating
Partnership and used to repay $50.3 million of debt due to Petro, which was
assumed by the Operating Partnership in the Star Gas Conveyance and the
Partnership used the balance of $5.6 million for general operating
purposes.
In order that the Partnership would commence operations with $6.2
million of working capital on December 20, 1995, the Conveyance Agreement
provided that the amount of debt due to Petro at closing would be adjusted
upwards or downwards to the extent that the Star Gas Partners' net working
capital exceeded or was less than $6.2 million. At closing, net working
capital was $9.7 million and $3.5 million was repaid to Petro on January
18, 1996.
F-7
1) PARTNERSHIP ORGANIZATION AND FORMATION (CONTINUED)
The General Partner holds a 1.0% general partner interest in Star Gas
Partners and a 1.0101% general partner interest in the Operating
Partnership. Star Gas Partners and the Operating Partnership have no
employees, except for certain employees of its corporate subsidiary Stellar
Propane Service Corporation. The General Partner conducts, directs and
manages all activities of Star Gas Partners and the Operating Partnership
and is reimbursed on a monthly basis for all direct and indirect expenses
it incurs on their behalf including the cost of employee wages.
The Operating Partnership is and the Star Gas Group was, primarily
engaged in the retail distribution of propane and related supplies and
equipment to residential, commercial, industrial, agricultural and motor
fuel customers, operating from 55 branches in the Midwest and 19 branches
in the Northeast. Propane is used primarily for space heating, water
heating and cooking by the Partnership's residential and commercial
customers and as a result, weather conditions have a significant impact on
the demand for propane for both heating and agricultural purposes.
Accordingly, actual weather conditions can vary substantially from year to
year, significantly affecting the Partnership's financial performance.
2) PROPOSED ACQUISITION OF PETROLEUM HEAT AND POWER CO., INC.
On October 23, 1998, the Partnership and Petro jointly announced that
they have signed a definitive merger agreement pursuant to which Petro
would become a wholly-owned subsidiary of the Partnership ("the Star
Gas/Petro transaction"). This transaction would be effected through Petro
shareholders exchanging their 26,562,481 shares of Petro Common Stock for
3,623,236 limited partnership units and General Partnership units of the
Partnership which will be subordinated to the existing Common Units of the
Partnership.
The Partnership currently distributes to its partners, on a quarterly
basis, all of its Available Cash, which is generally all of the cash
receipts of the Partnership less all cash disbursements, with a targeted
Minimum Quarterly Distribution ("MQD") of $0.55 per Unit, or $2.20 per Unit
on an annualized basis. In connection with the Star Gas/Petro transaction,
the Partnership will increase the MQD to $.575 per unit or $2.30 per unit
on an annualized basis. This increase in the MQD reflects the expectation
that the transaction will be accretive to the Partnership. The increase in
the MQD will also serve to raise the threshold needed to end the
subordination period.
Of the 3,623,236 subordinated Partnership units anticipated to be
distributed to Petro shareholders, 2,767,058 will be Senior Subordinated
Units and 856,178 will be Junior Subordinated Units and General Partnership
Units. The Senior Subordinated Units will be publicly registered and
tradable (they are expected to be listed on the New York Stock Exchange)
and will be subordinated in distributions to the Partnership's Common
Units. The Junior Subordinated Units and General Partnership Units will
not be registered nor publicly tradable and will be subordinated to both
the Common Units and the Senior Subordinated Units. The Senior Subordinated
Units will be exchanged with holders of Petro's publicly traded Class A
Common Stock and the Junior Subordinated Units and General Partnership
Units will be exchanged with individuals that currently own Petro's Class C
common stock and Class A common stock. Certain holders of Petro's Class C
Common Stock will also exchange their shares for Senior Subordinated Units.
It is currently contemplated that 21,180,789 shares of Petro Common
Stock will be exchanged for 2,767,058 Senior Subordinated Units of
Partnership. 5,381,692 shares of Petro Common Stock, held by certain
individuals who currently own Petro Class C Common Stock, including Irik P.
Sevin, Chairman of both Petro and of the General Partner of the Partnership
and other members of a group that currently controls Petro, will be
exchanged for 577,205 Junior Subordinated Units and 278,973 General
Partnership Units which are economically equivalent to Junior Subordinated
Units.
F-8
2) PROPOSED ACQUISITION OF PETROLEUM HEAT AND POWER CO., INC. (CONTINUED)
Pursuant to the partnership subordination provision, distributions on
the Partnership's Senior Subordinated Units may be made only after
distributions of Available Cash on Common Units meet the Minimum Quarterly
Distribution requirement. Distributions on the Partnership's Junior
Subordinated Units and General Partner Units may be made only after
distributions of Available Cash on Common Units and Senior Subordinated
Units meet the Minimum Quarterly Distribution requirement. The
Subordination Period will generally extend until the Partnership earns and
pays its MQD for three years.
As a condition of the Star Gas/Petro transaction, the Partnership
agreement will be amended so that no distribution will be paid on the
Senior Subordinated Units, Junior Subordinated Units, or the General
Partner Units except to the extent Available Cash is earned from
operations.
Like many other publicly traded master limited partnerships, the
Partnership contains a provision which provides the General Partner with
incentive distributions in excess of certain targeted amounts. This
provision will be modified so that should there be any such incentive
distributions, they will be made pro rata to the holders of Senior
Subordinated Units, Junior Subordinated Units, and General Partner Units.
In connection with the Star Gas/Petro transaction, the Senior
Subordinated Units, Junior Subordinated Units and General Partnership Units
can earn, pro rata, 303,000 additional Senior Subordinated Units each year
that Petro meets certain financial goals to a maximum of 909,000 additional
Senior Subordinated Units.
In connection with the Star Gas/Petro transaction, the Partnership
intends to raise approximately $140 million through a public offering of
Common Units and $120 million through a public or private offering of debt
securities. The net proceeds from these offerings will be used primarily
to redeem approximately $240 million in Petro public and private debt and
preferred stock. Any such offering will be made only by means of a
prospectus or in transactions not requiring registration under securities
laws.
Petro has completed an exchange offer agreement with institutional
holders of an aggregate of $233 million or 98% of its public debt and
preferred stock to permit the redemption of such securities at the closing
of the Star Gas/Petro transaction. This agreement allows Petro to redeem
its 9 3/8% Subordinated Debentures, 10 1/8% Subordinated Notes and 12 1/4%
Subordinated Debentures at 100%, 100% and 103.5% of principal amount,
respectively, plus accrued interest and also to redeem its 12 7/8%
Preferred Stock at $23 per share, plus accrued and unpaid dividends. In
consideration for this early redemption right, Petro has agreed to issue to
such holders 3.37 shares of newly issued Petro Junior Convertible Preferred
Stock for each $1,000 in principal amount or liquidation preference of such
securities. Each share of Petro Junior Convertible Preferred Stock will be
exchangeable into .13064 of a Partnership Common Unit at the conclusion of
the Star Gas/Petro transaction representing a maximum of 102,773 Common
Units. Petro also intends to restructure $66.2 million of privately held
Notes currently outstanding.
Petro currently has a 40.5% equity interest in the Partnership. After
completion of the Star Gas/Petro transaction, the Petro shareholders will
own approximately 26% of the Partnership's equity through Subordinated
Units and General Partnership Units. The holders of the Partnership's
Common Units (including an estimated 6.4 million Common Units that will be
sold in the Partnership's $140 million public offering) will own an
approximate aggregate 74% equity interest in the Partnership following the
completion of the transaction. The General Partner of the Partnership will
be a newly organized Delaware limited liability company that will be owned
by Irik Sevin, Audrey Sevin and two entities affiliated with Wolfgang
Traber (see Part III Item 10 - Directors and Executive Officers of the
Registrant).
F-9
2) PROPOSED ACQUISITION OF PETROLEUM HEAT AND POWER CO., INC., (CONTINUED)
A Special Committee of the Star Board of Directors, acting on behalf
of the Public Common Unitholders, negotiated the terms of the Star
Gas/Petro Transaction. A.G. Edwards & Sons, Inc. was retained by the
Special Committee as independent financial advisor, and has rendered an
opinion that the Star Gas/Petro Transaction is fair, from a financial point
of view, to the public Common Unitholders.
The completion of the Star Gas/Petro Transaction is subject to the
receipt of regulatory approvals, the approval of Star's non-affiliated
Common unitholders and non-affiliated Petro shareholders and other
necessary partnership and corporate approvals.
3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Consolidated Financial Statements for the period October 1, 1995
through December 20, 1995 include the propane operations, assets and
liabilities of the Predecessor Company. The Consolidated Financial
Statements for the period December 20, 1995 through September 30, 1996 and
for the years ended September 30, 1997 and September 30, 1998 include the
accounts of Star Gas Partners, L.P., the Operating Partnership and its
corporate subsidiary, Stellar Propane Service Corp., collectively referred
to herein as (the "Partnership"). All material intercompany items and
transactions have been eliminated in consolidation and certain
reclassifications have been made to the 1996 financial statements to
conform to the 1997 and 1998 presentation.
Net Income (loss) per Limited Partner Unit
Net income (loss) per Limited Partner Unit is computed by dividing net
income (loss), after deducting the General Partner's 2.0% interest, by the
weighted average number of Common Units and Subordinated Units outstanding.
Revenue Recognition
Sales of propane and propane appliances are recognized at the time of
delivery of the product to the customer or at the time of sale or
installation. Revenue from service repairs and maintenance is recognized
upon completion of the service provided.
Inventories
Inventories are stated at the lower of cost or market and are computed
on a first-in, first-out basis. At the dates indicated the components of
inventory were as follows:
SEPTEMBER 30,
--------------------
1997 1998
---- ----
Propane gas............................... $4,805 $ 8,807
Appliances and equipment.................. 1,792 1,801
------ -------
$6,597 $10,608
====== =======
Substantially all of the Partnership's propane supplies for the
Northeast retail operations are purchased under supply contracts. Certain
of the supply contracts provide for minimum and maximum amounts of propane
to be purchased thereunder, and provide for pricing in accordance with
posted prices at the time of delivery or include a pricing formula that
typically is based on current market prices. During 1996, 1997 and 1998,
spot purchases from Mont Belvieu sources accounted for approximately 26%,
36% and 21%, respectively, of the Partnership's total volume of propane
purchases. In addition, the three single largest suppliers accounted for an
aggregate of approximately 32%, 31% and 47%, respectively, of total propane
purchases in 1996, 1997 and 1998.
F-10
3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Partnership may enter into forward contracts with Mont Belvieu
suppliers or refineries which call for a fixed price for the product to be
purchased based on current market conditions, with delivery occurring at a
later date. In most cases the Partnership has entered into similar
agreements to sell this product to customers for a fixed price based on
market conditions. In the event that the Partnership enters into these
types of contracts without a subsequent sale, it is exposed to some market
risk. Currently, the Partnership does not have any contracts that if
market conditions were to change, would have a material affect on its
financial statements.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed
over the estimated useful lives of the depreciable assets using the
straight-line method.
Intangible Assets
The excess of cost over the fair value of net assets resulting from
the acquisition of the Company by Petro in December 1994 is being amortized
using the straight-line method over 25 years. Other intangible assets,
including covenants not to compete and customer lists are recorded at cost
and are being amortized over their estimated useful lives, ranging from 1
to 15 years. Also included as intangible assets are the costs associated
with the issuance of the Company's First Mortgage Notes which are being
amortized under the interest method over the life of the notes. It is the
Partnership's policy to review intangible assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of
such assets may not be recoverable. The Partnership determines that the
carrying values of intangible assets are recoverable over their remaining
estimated lives through undiscounted future cash flow analysis. If such a
review should indicate that the carrying amount of the intangible assets is
not recoverable, it is the Partnership's policy to reduce the carrying
amount of such assets to fair value.
Customer Credit Balances
Customer credit balances represent pre-payments received from
customers. These payments relate primarily to a budget payment plan whereby
customers pay their estimated annual propane gas charges on a fixed monthly
basis and the payments made have exceeded the charges for the deliveries.
Use of Estimates
In accordance with generally accepted accounting principles,
management of the Partnership has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these financial
statements. Actual results could differ from those estimates.
Cash Equivalents
The Partnership considers all highly liquid investments with a
maturity of three months or less, when purchased, to be cash equivalents.
Income Taxes
The Partnership is a master limited partnership. As a result, for
Federal income tax purposes, earnings or losses are allocated directly to
the individual partners. Except for the Partnership's corporate subsidiary
which generates non-qualifying Master Limited Partnership income, no
recognition has been given to Federal income taxes in the accompanying
financial statements of the Partnership. Net earnings for financial
statement purposes may differ significantly from taxable income reportable
to unitholders as a result of differences between the tax basis and
financial reporting basis of assets and liabilities and due to the taxable
income allocation requirements of the Partnership agreement.
F-11
4) QUARTERLY DISTRIBUTION OF AVAILABLE CASH
The Partnership distributes to its partners, on a quarterly basis, all
of its "Available Cash." Available Cash generally means, with respect to
any fiscal quarter of the Partnership, all cash on hand at the end of such
quarter, less the amount of cash reserves that are necessary or appropriate
in the reasonable discretion of the General Partner.
Distribution by the Partnership in an amount equal to 100% of its
Available Cash will generally be made 98% to the Common and Subordinated
Unitholders and 2% to the General Partner, subject to the payment of
incentive distributions in the event Available Cash exceeds the Minimum
Quarterly Distribution ($0.55) on all Units. To the extent there is
sufficient Available Cash, the holders of Common Units have the right to
receive the Minimum Quarterly Distribution, plus any arrearage, prior to
the distribution of Available Cash to holders of Subordinated Units. Common
Units will not accrue arrearage for any quarter after the end of the
Subordination Period (as defined below) and Subordinated Units will not
accrue any arrearage with respect to distributions for any quarter.
The first distribution commenced with the quarter ending March 31,
1996 and was paid on May 15, 1996 to holders of record as of May 1, 1996.
The initial distribution was $0.6225 per unit and represented a pro rata
distribution of $0.0725 per unit for the period December 20, 1995 to
December 31, 1995 and a quarterly distribution of $0.55 per unit for the
three months ended March 31, 1996. During fiscal 1996, distributions of
$1.17 per unit (including the initial distribution) were declared and paid
on all common, subordinated and general partnership interests. The
aggregate amount paid for such distributions was $6.3 million during fiscal
1996.
During fiscal 1997, distributions of $2.20 per unit were declared and
paid on all common, subordinated and general partnership interests. The
aggregate paid for such distributions was $11.8 million during fiscal 1997.
During fiscal 1998, distributions of $2.20 per unit were declared and
paid on all common, subordinated and general partnership interests. The
aggregate paid for such distributions was $13.4 million during fiscal 1998.
5) DISTRIBUTIONS FROM OPERATING SURPLUS DURING SUBORDINATION PERIOD
The Subordination Period will generally extend until the first day of
any quarter beginning on or after January 1, 2001 in respect of which (i)
distributions of Available Cash from Operating Surplus on the Common Units
and the Subordinated Units equals or exceeds the sum of the Minimum
Quarterly Distribution on all of the outstanding Common Units and
Subordinated Units with respect to each of the three non-overlapping four-
quarter periods immediately preceding such date, (ii) the Adjusted
Operating Surplus generated during each of the three immediately preceding
non-overlapping four-quarter periods equals or exceeds the sum of the
Minimum Quarterly Distribution on all of the outstanding Common Units and
Subordinated Units during such periods and (iii) there are no arrearages in
payment of the Minimum Quarterly Distribution on the Common Units.
Prior to the end of the Subordination Period, a portion of the
Subordinated Units will convert into Common Units on the first day after
the record date established for any quarter ending on or after March 31,
1999 (with respect to 599,020 of the Subordinated Units) and March 31, 2000
(with respect to an additional 599,020 of the Subordinated Units), on a
cumulative basis, in respect of which (i) distributions of Available Cash
from Operating Surplus on the Common Units and the Subordinated Units
equals or exceeds the sum of the Minimum Quarterly Distribution on all of
the outstanding Common Units and Subordinated Units with respect to each of
the three non-overlapping four-quarter periods immediately preceding such
date, (ii) the Adjusted Operating Surplus generated during each of the
three immediately preceding non-overlapping four-quarter periods equals or
exceeds the sum of the Minimum Quarterly Distribution on all of the
outstanding Common Units and Subordinated Units during such periods and
(iii) there are no arrearages in payment of the Minimum Quarterly
Distribution on the common units
F-12
6) ACQUISITIONS - PRO FORMA
During fiscal 1996, the Partnership acquired two propane dealers with
an aggregate cost of $2.4 million.
During fiscal 1997, no acquisitions were completed.
During fiscal 1998, the Partnership acquired seven unaffiliated retail
propane dealers with an aggregate cost of $35.7 million. The most
significant transaction was the acquisition of the Pearl Gas Co., "Pearl"
and is described below.
In October 1997, pursuant to a purchase agreement, the General Partner
purchased 240 shares of Common Stock ($100 par value) of Pearl,
representing all of its issued and outstanding capital stock. The purchase
price was $23.0 million and included working capital of $1.9 million and
$0.4 of transaction expenses. Funding for this purchase was provided by a
$23.0 million bank acquisition facility. Subsequent to the acquisition,
Pearl was merged into the General Partner as part of a tax-free
liquidation.
The General Partner then contributed to the Partnership all of the
assets it obtained in the stock purchase of Pearl Gas in exchange for a
2.7% interest in the Partnership and the assumption of all liabilities
associated with the Pearl stock including the $23.0 million of bank debt.
The aggregate value of the interests transferred to Star Gas from the
Partnership is $3.5 million.
The issuance of the additional partnership interests to Star Gas was
intended to compensate Star Gas for additional significant income tax
liabilities which would be reflected in the consolidated federal income tax
return of the General Partner's parent corporation, Petro. The issuance of
such partnership interests was approved by the Audit Committee of Star Gas
and the Executive Committee of Petro.
The acquisitions were accounted for under the purchase method of
accounting. Purchase prices have been allocated to the acquired assets and
liabilities based on their respective fair market values on the dates of
acquisition. The purchase prices in excess of the fair values of net
assets acquired were classified as intangibles in the Consolidated Balance
Sheets. Sales and net income have been included in the Consolidated
Statements of Operations from the respective dates of acquisition.
Unaudited Pro forma data giving effect to the purchased businesses as
if they had been acquired on October 1 of the year preceding the year of
purchase is as follows:
YEARS ENDED SEPTEMBER 30,
-------------------------
1997 1998
---- ----
Sales $155,111 $116,071
======== ========
Net income (loss) $ 4,375 $ (606)
======== ========
F-13
7) PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment and their estimated useful
lives were as follows at the indicated dates:
YEARS ENDED SEPTEMBER 30,
-------------------------
1997 1998 USEFUL LIVES
----- ---- ----------------------
Land $ 4,060 $ 4,635 -
Buildings 8,871 10,313 30 years
Fleet 14,464 16,918 5 - 30 years
Tanks and equipment 84,766 102,493 5 - 30 years
Furniture and fixtures 2,504 2,833 10 years
-------- --------
Total 114,665 137,192
Less accumulated depreciation (19,383) (26,930)
-------- --------
Total $ 95,282 $110,262
======== ========
8) INTANGIBLES AND OTHER ASSETS
The components of intangibles and other assets were as follows at the
indicated dates:
YEARS ENDED SEPTEMBER 30,
-----------------------------------------
1997 1998
-------- --------
Goodwill $14,186 $ 25,690
Covenants not to compete 2,040 2,341
Customer lists 28,797 34,028
Deferred charges and other assets 2,822 2,907
------- --------
Total 47,845 64,966
Less accumulated amortization (9,823) (13,568)
------- --------
Total $38,022 $ 51,398
======= ========
9) LONG-TERM DEBT AND WORKING CAPITAL BORROWINGS
Long-term debt consists of the following:
YEARS ENDED SEPTEMBER 30,
-----------------------------------------
1997 1998
------- -------
8.04% First Mortgage Notes $85,000 $ 85,000
7.17% First Mortgage Notes - 11,000
Acquisition Facility borrowings - 9,000
------- --------
Total 85,000 105,000
Less current maturities - (692)
------- --------
Total $85,000 $104,308
======= ========
In December 1995, the General Partner issued $85.0 million of first
mortgage notes (the "First Mortgage Notes") with an annual interest rate of
8.04%. These notes were assumed as part of the Star Gas Conveyance by the
Operating Partnership. In December 1997, the Operating Partnership issued
an additional $11.0 of First Mortgage Notes with an annual interest rate of
7.17%. The Operating Partnership's obligations under the First Mortgage
Note Agreements are secured, on an equal basis with the Operating
Partnership's obligations under the Bank Credit Facilities, by a mortgage
on substantially all of the real property and liens on substantially all of
the operating facilities, equipment and other assets of the Operating
Partnership. The First Mortgage Notes will mature September 15, 2010, and
will require semiannual prepayments, without premium on the principal
thereof,
F-14
9) LONG-TERM DEBT AND WORKING CAPITAL BORROWINGS (CONTINUED)
beginning on March 15, 2001. Interest is payable semiannually on March 15
and September 15. For the year ended September 30, 1998, the Partnership
incurred interest expense in the amount of $7.4 million on the First
Mortgage Notes.
The First Mortgage Note Agreements contains various restrictive and
affirmative covenants applicable to the Operating Partnership, including
restrictions on the incurrence of additional indebtedness and restrictions
on certain investments, guarantees, loans, sales of assets and other
transactions.
The Bank Credit Facilities consist of a $25.0 million Acquisition
Facility and a $12.0 million Working Capital Facility. The agreement
governing the Bank Credit Facilities contains covenants and default
provisions generally similar to those contained in the First Mortgage Note
Agreements. As of September 30, 1998, there were $9.0 million outstanding
in borrowings under the Acquisition Facility and $4.8 million outstanding
in borrowings under the Working Capital Facility. The Bank Credit
Facilities bear interest at a rate based upon, at the Partnership's option,
either the London Interbank Offered Rate plus a margin or a Base Rate (each
as defined in the Bank Credit Facilities). The Partnership is required to
pay a fee for unused commitments which amounted to $0.1 million for fiscal
1996, $0.2 million for fiscal 1997 and $0.1 million for fiscal 1998. For
fiscal 1998, the weighted average interest rate on borrowings under these
facilities was 7.46%
The Working Capital Facility will expire June 30, 2000, but may be
extended annually thereafter with the consent of the banks. Borrowings
under the Acquisition Facility will revolve until June 30, 1999, after
which time any outstanding loans thereunder, will amortize quarterly in
equal principal payments with a final payment due on September 30, 2002.
However, there must be no amount outstanding under the Working Capital
Facility for at least 30 consecutive days during each fiscal year.
As of September 30, 1998, the annual maturities of the First Mortgage
Notes and borrowing under the acquisition facility are set forth in the
following table:
1999 $ 692
2000 2,769
2001 4,693
2002 11,471
2003 10,625
Thereafter 74,750
--------
$105,000
========
As of September 30, 1998, the Partnership was in compliance with all
borrowing agreement covenants, as amended.
10) EMPLOYEE BENEFIT PLANS
Star Gas has a 401(k) plan which covers certain eligible union and
non-union employees. Subject to IRS limitations, the 401(k) plan provides
for each employee to contribute from 1.0% to 15.0% of compensation. Star
Gas contributes to non-union participants a matching amount up to a maximum
of 3.0% of compensation. Aggregate matching contributions made to the
401(k) plan during fiscal 1996, 1997 and 1998 were $0.3 million, $0.4
million and $0.3 million, respectively.
F-15
10) EMPLOYEE BENEFIT PLANS (CONTINUED)
Star Gas also makes monthly contributions on behalf of its union
employees to a union sponsored defined benefit plan. The amount charged to
expense was $0.3 million, $0.4 million and $0.4 million in fiscal 1996,
1997 and 1998, respectively.
11) UNIT OPTION PLAN
On December 20, 1995, the General Partner adopted the 1995 Star Gas
Corporation Unit Option Plan (the "Unit Option Plan"), which currently
authorizes the issuance of options (the "Unit Options") and Unit
Appreciation Rights ("UARS") covering up to 300,000 Subordinated Units to
certain officers and employees of the General Partner. A total of 40,000
options were granted to key executives in December 1995. The Unit Options
have the following characteristics: 1) an exercise price of $22 per unit,
which is an estimate of the fair market value of the Subordinated Units at
the time of grant, 2) vest over a five year period, 3) are exercisable
after January 1, 2001, assuming the subordination period has elapsed, and
4) expire on the tenth anniversary of the date of grant. Upon conversion
of the Subordinated Units held by the General Partner and its affiliates,
the Unit Options granted will convert to Common Unit Options. No UARS have
been granted pursuant to the plan.
12) LEASE COMMITMENTS
The Partnership has entered into certain operating leases for office
space, trucks and other equipment.
The future minimum rental commitments at September 30, 1998 under
leases having an initial or remaining non-cancelable term of one year or
more are as follows:
1999 $ 939
2000 808
2001 751
2002 638
2003 285
Thereafter 379
------
Total Minimum lease payments $3,800
======
The Partnership incurred rent expense of $1.2 million, $1.3 million
and $1.2 million in 1996, 1997 and 1998, respectively.
F-16
13) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
YEARS ENDED SEPTEMBER 30,
--------------------------------------------------------------
1996 1997 1998
----- ----- -----
Cash paid during the year for:
Income taxes $ 80 $ 7 $ 8
============= =========== ==========
Interest $ 5,088 $ 7,170 $ 7,915
============= =========== ==========
Non-cash investing activities:
Acquisitions:
Working capital $ 1,945
Long-term assets $ 25,134
Assumption of note payable $ (23,000)
Non-cash financing activities:
Issuance of Common units $ (3,999)
Additional General Partner interest $ (80)
14) COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Partnership is threatened
with, or is named in, various lawsuits. The Partnership is not a party to
any litigation which individually or in the aggregate could reasonably be
expected to have a material adverse effect on the Partnership.
15) RELATED PARTY TRANSACTIONS
The Partnership has no employees except for certain employees of its
corporate subsidiary, Stellar Propane Service Corporation and is managed
and controlled by the General Partner. Pursuant to the Partnership
Agreement, the General Partner is entitled to reimbursement for all direct
and indirect expenses incurred or payments it makes on behalf of the
Partnership, and all other necessary or appropriate expenses allocable to
the Partnership or otherwise reasonably incurred by the General Partner in
connection with operating the Partnership's business. For the fiscal years
ended September 30, 1996, 1997 and 1998, the Partnership reimbursed the
General Partner and Petro $14.4 million, $17.1 million and $19.6 million,
respectively, representing salary, payroll tax and other compensation paid
to the employees of the General Partner, including $0.3 million, $0.2
million and $0.1 million, respectively, paid to Petro for certain corporate
functions such as finance and compliance. In addition, the Partnership
reimbursed Petro $1.9 million, $0.9 million and $0.8 million for the fiscal
years ended September 30, 1996, 1997 and 1998, respectively, relating to
the Partnership's share of the costs incurred by Petro in conducting the
operations of a certain shared branch location which includes managerial
services.
16) DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash, Accounts Receivable, Notes Receivable and Other Current Assets,
Working Capital Borrowing, Accounts Payable and Accrued Expenses
----------------------------------------------------------------
The carrying amount approximates fair value because of the short
maturity of these instruments.
F-17
16) DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Long-Term Debt
--------------
The fair values of each of the Partnership's long-term financing
instruments, including current maturities, are based on the amount of
future cash flows associated with each instrument, discounted using the
Company's current borrowing rate for similar instruments of comparable
maturity.
The estimated fair value of the Partnership's long-term debt is
summarized as follows:
AT SEPTEMBER 30, 1998
--------------------------------------------
CARRYING AMOUNT ESTIMATED FAIR VALUE
--------------- --------------------
Long-term debt $104,308 $105,914
======== ========
17) GENERAL PARTNER BALANCE SHEET
The following presents the Condensed Consolidated Balance Sheet as of
December 31, 1997 of the General Partner, Star Gas Corporation.
DECEMBER 31, 1997
-------------------------
(IN THOUSANDS)
ASSETS
Current assets
Cash $ 3
Investments 26
Interest receivable 330
--------
Total current assets 359
Investment in Star Gas Partners, L.P. 7,815
Note receivable from Petro 12,000
--------
Total assets $ 20,174
========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Accrued expenses $ 26
--------
Total current liabilities 26
Taxes payable 3,467
Shareholder's equity
Common stock -
Preferred stock 508
Additional paid in capital 55,887
Retained earnings (deficit) (39,714)
--------
Total shareholder's equity 16,681
--------
Total liabilities & shareholder's equity $ 20,174
========
F-18
18) SUBSEQUENT EVENTS
On October 21, 1998, the Partnership announced that it would pay a
distribution of $0.55 per Common Unit for the three months ended September
30, 1998. The distribution is payable on November 13, 1998 to holders of
record as of November 3, 1998. No distributions were declared on the
Subordinated Units for this period.
19) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The seasonal nature of the Partnership's business results in the sale
by the Partnership of approximately 35% of its volume in the first fiscal
quarter and 40% of its volume in the second fiscal quarter of each year.
The Partnership generally realizes net income in both of these quarters and
net losses during the quarters ending June and September.
THREE MONTHS ENDED
-----------------------------------------------------------------------------
DECEMBER 31, 1996 MARCH 31, 1997 JUNE 30, 1997 SEPTEMBER 30, 1997 TOTAL
--------------------- ----------------- ---------------- ---------------------- -----------
Sales $50,876 $46,442 $20,078 $17,763 $135,159
Gross profit 21,849 21,523 10,446 9,130 62,948
Income (loss) before taxes 5,898 5,332 (4,138) (5,055) 2,037
Net income (loss) 5,892 5,325 (4,143) (5,062) 2,012
Limited Partner interest in
net income (loss) 5,774 5,218 (4,060) (4,960) 1,972
Net income (loss) per
Limited Partner Unit/(a)/ $ 1.10 $ 0.99 $ (0.77) $ (0.94) $ 0.37
THREE MONTHS ENDED
-----------------------------------------------------------------------------
DECEMBER 31, 1997 MARCH 31, 1998 JUNE 30, 1998 SEPTEMBER 30, 1998 TOTAL
--------------------- ------------------ --------------- ----------------------- ----------
Sales $41,844 $37,884 $16,243 $15,714 $111,685
Gross profit 20,194 22,326 9,725 9,942 62,187
Income (loss) before taxes 3,713 6,370 (5,229) (5,784) (930)
Net income (loss) 3,707 6,363 (5,235) (5,790) (955)
Limited Partner interest in
net income (loss) 3,633 6,236 (5,130) (5,675) (936)
Net income (loss) per
Limited Partner Unit/(a)/ $ 0.66 $ 1.00 $ (0.82) $ (0.91) $ (0.16)
____________________________
/(a)/ Amounts do not add due to weighting of Limited Partner Units outstanding.
F-19
STAR GAS PARTNERS, L.P. AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
(IN THOUSANDS)
ADDITIONS
BALANCE AT -----------------------------------
BEGINNING OF CHARGED TO OTHER CHANGES BALANCE AT
YEAR DESCRIPTION YEAR COSTS & EXPENSES ADD (DEDUCT) END OF YEAR
---- ----------- ------------ ---------------- ------------- -----------
1996 Allowance for doubtful $362 422 (184) /(b)/ $291
accounts ==== === (309) /(a)/ ====
===============
1997 Allowance for doubtful $291 312 (330) /(a)/ $273
accounts ==== === =============== ====
1998 Allowance for doubtful $273 239 (260)/(a)/ $252
accounts ==== === =============== ====
/(a)/ Bad debts written off (net of recoveries).
/(b)/ Amount excluded from the Star Gas Conveyance which took place on
December 20, 1995.
F-20
EXHIBIT 10.13
FOURTH AMENDMENT dated as of November 3, 1998 (this "Fourth
------
Amendment"), to the Credit Agreement dated as of December 13,
---------
1995 (as amended prior to the date hereof, the "Credit
------
Agreement"), among Star Gas Propane, L.P., a Delaware limited
partnership (the "Borrower"), the lenders party thereto, The
--------
First National Bank of Boston (now known as BankBoston, N.A.), as
Administrative Agent (the "Administrative Agent"), and
--------------------
NationsBank, N.A., as Documentation Agent (the "Documentation
-------------
Agent", and together with the Administrative Agent, the
-----
"Agents").
------
The Borrower has requested the Agents and the Lenders to make certain
changes to the Credit Agreement. The parties hereto have agreed, subject to the
terms and conditions hereof, to amend the Credit Agreement as provided herein.
Capitalized terms used and not otherwise defined herein shall have the
meanings assigned to such terms in the Credit Agreement (the Credit Agreement,
as amended by, and together with, this Fourth Amendment, and as hereinafter
amended, modified, extended or restated from time to time, being called the
"Amended Agreement").
- ------------------
Accordingly, the parties hereto hereby agree as follows:
SECTION 1.01. Amendment to Section 4.03. Section 4.03(a) of the Credit
-------------------------
Agreement is hereby deleted in its entirety and the following is substituted in
lieu thereof:
"(a) At the time of and immediately after any Tranche B Revolving
Credit Borrowing made or any Tranche B Letter of Credit issued (i) on or before
June 30, 1999, the Leverage Ratio as of the date of such Borrowing or issuance
(after giving affect to the acquisition or Growth-Related Capital Expenditure
for which such Borrowing or Letter of Credit is being used) shall be no greater
than 5.00:1.00 and (ii) after June 30, 1999, the Leverage Ratio as of the date
of such Borrowing or issuance (after giving affect to the acquisition or Growth-
Related Capital Expenditure for which such Borrowing or Letter of Credit is
being used) shall be no greater than 4.50:1.00; and, in the case of each such
Borrowing or issuance of each such Letter of Credit, the Borrower shall have
prepared and furnished to the Agents prior to such Borrowing or issuance pro
forma financial statements demonstrating the fulfillment of such condition to
the satisfaction of the Agents. For purposes of calculating the Leverage Ratio
as required by this Section 4.03(a), Consolidated Cash Flow for the Reference
Period shall mean the greater of (A) Consolidated Cash Flow for the most recent
period of four consecutive fiscal quarters prior to the date of determination
and (B) 50% of Consolidated Cash Flow for the most recent period of eight
consecutive fiscal quarters prior to the date of determination."
SECTION 1.02. Amendment to Section 6.31. Section 6.31(a) of the Credit
-------------------------
Agreement is hereby deleted in its entirety and the following is hereby
substituted in lieu thereof:
"(a) The Borrower will not permit the ratio on any day (the "date of
determination") of (i) Total Funded Debt as of the last day of the
Reference Period with respect to such date of determination to (ii)
Consolidated Cash Flow for such Reference Period to be greater than the
ratio set forth below opposite the calendar period during which such date
of determination occurs:
Calendar Period Ratio
- --------------- -----
January 1, 1996 through 5.00:1.00
June 30, 1997
July 1, 1997 through 4.75:1.00
September 30, 1997
October 1, 1997 through 4.95:1.00
December 31, 1997
January 1, 1998 through 5.00:1.00
June 30, 1999
After June 30, 1999 4.50:1.00"
SECTION 1.03. Amendment to Section 9.01.
-------------------------
9.01(c) of the Credit Agreement is hereby deleted in its entirety and the
following is hereby deleted in its entirety and the following is hereby
substituted in lieu thereof:
"(c) if to the Documentation Agent, to it at Three Allen Center, 333 Clay
Street, Suite 4550, Houston, Texas 77002-4103, Attention of Daryl Patterson
(Telecopy no. (713) 651-4808), with a copy to Fennebresque, Clark, Swindell
& Hay, at NationsBank Corporate Center, 100 North Tryon Street, Suite 2900,
Charlotte, NC 28202-4011, Attention of Marvin L. Rogers (Telecopy No.
(704) 347-3838; and "
SECTION 1.04. Representations and Warranties. The Borrower hereby
------------------------------
represents and warrants to each of the Agents and the Lenders, as follows:
(a) The representations and warranties set forth in Article III of
the Amended Agreement, and in each other Loan Document, are true and
correct in all material respects on and as of the date hereof and on and as
of the Fourth Amendment Effective Date (as hereinafter defined) with the
same effect as if made on and as of the date hereof or the Fourth Amendment
Effective Date, as the case may be, except to the extent such
representations and warranties expressly relate solely to an earlier date.
(b) Each of the Borrower and the Subsidiaries is in compliance with
all the terms and conditions of the Amended Agreement and the other Loan
Documents on its part to be observed or performed and no Default or Event
of Default has occurred or is continuing.
(c) The execution, delivery and performance by the Borrower of this
Fourth Amendment have been duly authorized by the Borrower.
(d) This Fourth Amendment constitutes the legal, valid and binding
obligation of the Borrower, enforceable against it in accordance with its
terms.
2
(e) The execution, delivery and performance by the Borrower of this
Fourth Amendment (i) will not violate (A) any provision of law, statute,
rule or regulation, or of the agreement of limited partnership of the
Borrower, (B) any order of any Governmental Authority or (C) any provision
of any indenture, agreement or other instrument to which the Borrower is a
party or by which it or any of its property may be bound and (ii) do not
require any consents under, result in a breach of or constitute (with
notice or lapse of time or both) a default or give rise to increased,
additional, accelerated or guaranteed rights of any Person under any such
indenture, agreement or other instrument.
SECTION 1.05. Effectiveness. This Fourth Amendment shall become
-------------
effective only upon satisfaction of the following conditions precedent (the
first date upon which each such condition has been satisfied being herein called
the "Fourth Amendment Effective Date"):
-------------------------------
(a) the Administrative Agent shall have received duly executed
counterparts of this Fourth Amendment which, when taken together, bear the
authorized signatures of the Borrower and the Required Lenders.
(b) The Agents shall be satisfied that the representations and
warranties set forth in Section 1.03 are true and correct on and as of the
Fourth Amendment Effective Date.
(c) There shall not be any action pending or any judgment, order or
decree in effect which, in the judgment of the Agents or the Lenders, is
likely to restrain, prevent or impose materially adverse conditions upon
performance by the Borrower of its obligations under the Amended Agreement.
(d) The Agents shall have received such other documents, legal
opinions, instruments and certificates relating to this Fourth Amendment as
they shall reasonably request and such other documents, legal opinions,
instruments and certificates shall be satisfactory in form and substance to
the Agents and the Lenders. All corporate and other proceedings taken or to
be taken in connection with this Fourth Amendment and all documents
incidental thereto, whether or not referred to herein, shall be
satisfactory in form and substance to the Agents and the Lenders.
(e) The Borrower shall have paid all fees and expenses referred to in
Section 1.07 of this Fourth Amendment.
SECTION 1.06. APPLICABLE LAW. THIS FOURTH AMENDMENT SHALL BE GOVERNED BY,
--------------
AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, EXCEPT TO
THE EXTENT THAT THE FEDERAL LAWS OF THE UNITED STATES OF AMERICA MAY APPLY.
SECTION 1.07. Expenses. The Borrower shall pay all reasonable out-of-
--------
pocket expenses incurred by the Agents and the Lenders in connection with the
preparation, negotiations execution, delivery and enforcement of this Fourth
Amendment, including, but not limited to, the reasonable fees and disbursements
of counsel.
SECTION 1.08. Counterparts. This Fourth Amendment may be executed in any
------------
number of counterparts, each of which shall constitute an original but all of
which when taken together shall constitute but one agreement.
3
SECTION 1.09. Loan Documents. Except as expressly set forth herein, the
--------------
amendments provided herein shall not by implication or otherwise limit,
constitute a waiver of, or otherwise affect the rights and remedies of the
Lenders, the Agents, the Trustee or the other Secured Parties under the Amended
Agreement or any other Loan Document, nor shall they constitute a waiver of any
Default or Event of Default, nor shall they alter, modify, amend or in any way
affect any of the terms, conditions, obligations, covenants or agreements
contained in the Amended Agreement or any other Loan Document. Each of the
amendments provided herein shall apply and be effective only with respect to the
provisions of the Amended Agreement specifically referred to by such amendments.
Except as expressly amended herein, the Amended Agreement and the other Loan
Documents shall continue in full force and effect in accordance with the
provisions thereof. As used in the Amended Agreement, the terms "Agreement",
"herein", "hereinafter", "hereunder", "hereto" and words of similar import shall
mean, from and after the date hereof, the Amended Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Fourth Amendment to
be duly executed by duly authorized officers, all as of the date first above
written.
STAR GAS PROPANE, L.P., as Borrower
By: Star Gas Corporation, its General Partner
by____________________________________________
Name:
Title:
BANKBOSTON, N.A.,
as Administrative Agent and as a Lender
by____________________________________________
Name:
Title:
NATIONSBANK, N.A., as Documentation Agent
and as a Lender
by____________________________________________
Name:
Title:
4
EXHIBIT 23.1
Consent of Independent Auditors
The Partners of
Star Gas Partners, L.P.:
We consent to incorporation by reference in the registration statement No.
333-47295 on Form S-3 and No. 333-49751 on Form S-4 of Star Gas Partners, L.P.
of our report dated November 13, 1998, relating to the consolidated balance
sheets of Star Gas Partners, L.P. and Subsidiary as of September 30, 1998 and
1997 and the related consolidated statements of operations, partners' capital
(predecessor equity) and cash flows for each of the years in the three-year
period ended September 30, 1998 and related schedule, which report appears in
the September 30, 1998 annual report on Form 10-K of Star Gas Partners, L.P.
Stamford, Connecticut
November 24, 1998
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5
1,000
12-MOS
SEP-30-1998
OCT-01-1997
SEP-30-1998
1,115
0
5,531
252
10,608
17,947
137,192
26,930
179,607
17,912
105,000
0
0
58,686
(1,339)
179,607
107,065
111,685
49,498
43,042
11,749
239
8,087
(930)
25
(955)
0
0
0
(955)
$(0.16)
$(0.16)
COMMON - IN DECEMBER 1995 STAR GAS PARTNERS, L.P. ISSUED COMMON AND
SUBORDINATED UNITS WHICH REPRESENT LIMITED PARTNER INTERESTS. THESE
UNITS ARE CONSIDERED TO POSSESS THE CHARACTERISTICS OF COMMON STOCK
AND ARE BOTH INCLUDED IN THE DETERMINATION OF EPS.
OTHER-SE - REPRESENTS THE GENERAL PARTNER'S INTEREST IN THE
PARTNERSHIP AND IS CLASSIFIED HERE SINCE IT DOES NOT POSSESS THE
RELEVANT CHARACTERISTICS OF EITHER COMMON OR PREFERRED STOCK.
