UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                             Washington, DC 20549

                                   FORM 10-Q

                                  (Mark One)

          [X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

               For the quarterly period ended December 31, 2000
                                              -----------------

                                      OR

         [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

             For the transition period from _________ to _________

                       Commission File Number: 33-98490
                                               --------

                            STAR GAS PARTNERS, L.P.
                            -----------------------
            (Exact name of registrant as specified in its charter)

Delaware 06-1437793 - --------------------------------------------------------------- --------------------------------------- (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 2187 Atlantic Street, Stamford, Connecticut 06902 - ------------------------------------------------------------------------------------------------------------------------------------ (Address of principal executive office) (Zip Code) (203) 328-7300 - ------------------------------------------------------------------------------------------------------------------------------------ (Registrant's telephone number, including area code) - ------------------------------------------------------------------------------------------------------------------------------------ (Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___________________________ --- Indicate the number of shares outstanding of each issuer's classes of common stock, as of January 31, 2001: 19,724,967 Common Units 2,696,946 Senior Subordinated Units 345,364 Junior Subordinated Units 325,729 General Partner Units STAR GAS PARTNERS, L.P. AND SUBSIDIARIES INDEX TO FORM 10-Q Part I Financial Information
Page ---- Item 1 - Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets as of September 30, 2000 and December 31, 2000 3 Condensed Consolidated Statements of Operations for the Three months ended December 31, 1999 and December 31, 2000 4 Condensed Consolidated Statements of Comprehensive Income for the Three months ended December 31, 1999 and December 31, 2000 5 Condensed Consolidated Statement of Partners' Capital for the three months ended December 31, 2000 6 Condensed Consolidated Statements of Cash Flows for the three months ended December 31, 1999 and December 31, 2000 7 Notes to Condensed Consolidated Financial Statements 8 - 14 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 15 - 19 Item 3 - Quantitative and Qualitative Disclosures About Market Risk 20 Part II Other Information: Item 6 - Exhibits and Reports on Form 8-K 20 Signature 21
2 STAR GAS PARTNERS, L.P. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)
December 31, September 30, 2000 2000 (unaudited) ------------ ----------- Assets Current assets: Cash and cash equivalents $ 10,910 $ 18,285 Receivables, net of allowance of $1,956 and $3,445 respectively 66,858 153,350 Inventories 34,407 56,375 Prepaid expenses and other current assets 14,815 24,965 ----------- ----------- Total current assets 126,990 252,975 ----------- ----------- Property and equipment, net 171,300 177,754 Long-term portion of accounts receivable 7,282 7,389 Intangibles and other assets, net 313,404 320,859 ----------- ----------- Total assets $ 618,976 $ 758,977 =========== =========== Liabilities and Partners' Capital Current liabilities: Accounts payable $ 27,874 $ 61,456 Working capital facility borrowings 24,400 94,933 Current maturities of long-term debt 16,515 30,029 Accrued expenses 42,410 50,187 Unearned service contract revenue 15,654 18,582 Customer credit balances 37,943 21,981 ----------- ----------- Total current liabilities 164,796 277,168 ----------- ----------- Long-term debt 310,414 302,834 Other long-term liabilities 4,588 4,760 Partners' Capital: Common unitholders 134,672 162,766 Subordinated unitholders 6,090 8,861 General partner (1,584) (1,301) Accumulated other comprehensive income - 3,889 ----------- ----------- Total Partners' Capital 139,178 174,215 ----------- ----------- Total Liabilities and Partners' Capital $ 618,976 $ 758,977 =========== ===========
See accompanying notes to condensed consolidated financial statements. 3 STAR GAS PARTNERS, L.P. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three Months Ended December 31, ------------------------------------- (in thousands, except per unit data) 1999 2000 ---------------- ----------------- Sales: Product $ 160,540 $ 290,591 Installation, service and appliances 26,346 32,913 ------------ ---------- Total sales 186,886 323,504 Costs and expenses: Cost of product 86,546 194,386 Cost of installation, service and appliances 30,885 36,916 Delivery and branch 40,302 49,334 Depreciation and amortization 8,404 9,647 General and administrative 4,681 6,893 TG&E customer acquisition expense - 653 Unit compensation expense - 500 Net gain on sales of assets 12 11 ------------ ---------- Operating income 16,080 25,186 Interest expense, net 6,473 8,117 Amortization of debt issuance costs 129 145 ------------ ---------- Income before income taxes and cumulative effect of change in accounting principle 9,478 16,924 Income tax expense 113 716 ------------ ---------- Income before cumulative change in accounting principle 9,365 16,208 Cumulative effect of change in accounting principle for adoption of SFAS No. 133, net of income taxes - 1,466 ------------ ---------- Net income $ 9,365 $ 17,674 ============ ========== General Partner's interest in net income $ 174 $ 283 ------------ ---------- Limited Partners' interest in net income $ 9,191 $ 17,391 ============ ========== Net income per Limited Partner unit: Basic $ 0.53 $ 0.87 ============ ========== Diluted $ 0.53 $ 0.86 ============ ========== Weighted average number of Limited Partner units outstanding: Basic 17,200 20,073 ============ ========== Diluted 17,200 20,186 ============ ==========
See accompanying notes to condensed consolidated financial statements. 4 STAR GAS PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)
Three Months Ended December 31, -------------------------------- (in thousands) 1999 2000 ----------- ------------ Net income $ 9,365 $ 17,674 Other comprehensive income (loss) Unrealized loss on derivative instruments - (6,305) ---------- ----------- Comprehensive income $ 9,365 $ 11,369 ========== =========== Reconciliation of Accumulated Other Comprehensive Income Balance, beginning of period $ - $ - Cumulative effect of the adoption of SFAS No. 133 - 10,544 Current period reclassification to earnings - (350) Current period other comprehensive loss - (6,305) ---------- ----------- Balance, end of period $ - $ 3,889 ========== ===========
See accompanying notes to condensed consolidated financial statements. 5 STAR GAS PARTNERS, L.P. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL (unaudited) (in thousands, except per unit amounts)
Number of Units --------------------------------------- Other Compre- Total Senior Junior General Senior Junior General hensive Partners' Common Sub. Sub. Partner Common Sub. Sub. Partner Income Capital ------ ---- ---- ------- ------ ---- ---- ------- ------ ------- ------------------------------------------------------------------------------------------------------- Balance as of September 30, 2000 16,045 2,587 345 326 $ 134,672 $ 6,125 $ (35) $ (1,584) $ - $ 139,178 Issuance of Common Units 1,495 23,364 23,364 Issuance of Senior Subordinated Units 110 859 859 Net income 14,811 2,279 301 283 17,674 Other comprehensive income Net change for the adoption of SFAS No 133 3,889 3,889 Distributions: ($0.575 per common unit) (10,081) (10,081) ($0.25 per senior subordinated Unit) (668) (668) ------------------------------------------------------------------------------------------------------- Balance as of December 31, 2000 17,540 2,697 345 326 $ 162,766 $ 8,595 $ 266 $ (1,301) $ 3,889 $ 174,215 =======================================================================================================
See accompanying notes to condensed consolidated financial statements. 6 STAR GAS PARTNERS, L.P. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(in thousands) Three Months Ended December 31, ------------------------------------- 1999 2000 ------------------ ------------- Cash flows from operating activities: Net income $ 9,365 $ 17,674 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 8,404 9,647 Amortization of debt issuance cost 129 145 Unit compensation expense - 500 Provision for losses on accounts receivable 430 1,337 Gain on sales of assets (12) (11) Cumulative effect of change in accounting principle for the adoption of SFAS No. 133 - (1,466) Changes in operating assets and liabilities, net of amounts acquired: Increase in receivables (41,376) (86,467) Increase in inventories (1,679) (16,322) Decrease (increase) in other assets 2,727 (10,155) Increase in accounts payable 7,410 33,726 Decrease in other current and long-term liabilities (6,876) (6,067) ---------- ---------- Net cash used in operating activities (21,478) (57,459) ---------- ---------- Cash flows from investing activities: Capital expenditures (1,569) (4,118) Proceeds from sales of fixed assets 135 127 Acquisitions (3,615) (19,621) ---------- ---------- Net cash used in investing activities (5,049) (23,612) ---------- ---------- Cash flows from financing activities: Working capital facility borrowings 47,600 79,190 Working capital facility repayments (9,425) (8,657) Acquisition facility borrowings 5,000 11,700 Acquisition facility repayments - (41,800) Proceeds from issuance of debt - 40,292 Repayment of debt (2,709) (4,258) Increase in deferred charges - (97) Proceeds from issuance of Common Units, net - 23,364 Distributions (8,270) (10,749) Other (251) (539) ---------- ---------- Net cash provided by financing activities 31,945 88,446 ---------- ---------- Net increase in cash 5,418 7,375 Cash at beginning of period 4,492 10,910 ---------- ---------- Cash at end of period $ 9,910 $ 18,285 ========== ==========
See accompanying notes to condensed consolidated financial statements. 7 STAR GAS PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1) Partnership Organization Star Gas Partners, L.P. ("Star Gas Partners" or the "Partnership") is a diversified home energy distributor and services provider, specializing in heating oil, propane, natural gas and electricity. Star Gas Partners is a Master Limited Partnership who at December 31, 2000 had 17.5 million common limited partner units (trading symbol "SGU" representing a 83.9% limited partner interest in Star Gas Partners) and 2.7 million senior subordinated units (trading symbol "SGH" representing a 12.9% limited partner interest in Star Gas Partners) are traded on the New York Stock Exchange. Additional interest in Star Gas Partners are represented by 0.3 million junior subordinated units (representing a 1.6% limited partner interest in Star Gas Partners) and 0.3 million general partner units (representing a 1.6% general partner interest in Star Gas Partners). Operationally the Partnership is organized as follows: . Petro Holdings, Inc. ("Petro" or the "heating oil segment"), is the nation's largest retail distributor of home heating oil and serves approximately 385,000 customers in the Northeast and Mid-Atlantic. Petro is an indirect wholly owned subsidiary of Star Gas Propane, L.P. . Star Gas Propane, L.P., ("Star Gas Propane" or the "propane segment") is a wholly owned subsidiary of Star Gas Partners. Star Gas Propane markets and distributes propane gas and related products to more than 210,000 customers in the Midwest and Northeast. . Total Gas and Electric ("TG&E" or the "natural gas and electric reseller segment") is an energy reseller that markets natural gas and electricity to residential homeowners in deregulated energy markets in the Northeast and Mid-Atlantic states of New York, New Jersey, Pennsylvania and Maryland and serves approximately 110,000 residential customers. TG&E is a 72.7% owned subsidiary of Star Gas Partners. 2) Summary of Significant Accounting Policies Basis of Presentation The Consolidated Financial Statements for the period October 1, 1999 through April 6, 2000 include the accounts of Star Gas Partners, L.P., and subsidiaries, principally Petro and Star Gas Propane. Beginning April 7, 2000, the Consolidated Financial Statements also include the accounts and results of operations of TG&E and reflects the amounts related to the 23.7% minority interest holder. The financial information included herein is unaudited; however, such information reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for the fair statement of financial condition and results for the interim periods. The results of operations for the three months ended December 31, 2000 are not necessarily indicative of the results to be expected for the full year. Inventories Inventories are stated at the lower 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, 2000 December 31, 2000 ------------------ ----------------- (in thousands) Propane gas $ 6,323 $12,256 Propane appliances and equipment 2,313 2,373 Fuel oil 14,263 24,460 Fuel oil parts and equipment 7,374 7,488 Natural gas 4,134 9,798 ------- ------- $34,407 $56,375 ======= =======
8 2) Summary of Significant Accounting Policies - (continued) Accounting Changes In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard No. 133 "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133) as amended by SFAS No. 137 and No. 138. SFAS No. 133 which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities. It requires the recognition of all derivative instruments as assets or liabilities in the Partnership's balance sheet and measurement of those instruments at fair value and requires that a company formally document, designate and assess the effectiveness of transactions that receive hedge accounting. The accounting treatment of changes in fair value is dependent upon whether or not a derivative instrument is designated as a hedge, and if so, the type of hedge. For derivatives designated as Cash Flow Hedges, changes in fair value are recognized in other comprehensive income until the hedged item is recognized in earnings. For derivatives recognized as Fair Value Hedges, changes in fair value are recognized in the income statement and are offset by related changes in the fair value of the item hedged. Changes in the fair value of derivative instruments, which are not designated as hedges or which do not qualify for hedge accounting are recognized currently in earnings. The Partnership periodically hedges a portion of its oil, propane and natural gas purchases through the use of futures, options, collars and swap agreements. The purpose of the hedges is to provide a measure of stability in the volatile market of oil, propane and natural gas prices and to manage its exposure to commodity price risk under certain existing sales commitments. The Partnership also has derivative agreements that management has decided not to treat as hedge transactions for accounting purposes and as such, mark-to-market adjustments are recognized currently in earnings. The Partnership adopted SFAS No. 133 on October 1, 2000, and records its derivatives at fair market value. As a result of adopting the Standard, the Partnership recognized current assets of $12.0 million, a $1.5 million increase in net income and a $10.5 million increase in additional other comprehensive income which were recorded as cumulative effect of a change in accounting principle. For the three month period ended December 31, 2000, the Partnership recorded a net decrease of $6.3 million to other comprehensive income for the net change in value of derivative instruments designated as cash flow hedges, and recorded a net loss of approximately $0.4 million representing the net change in the fair value of all the derivative contracts which are no longer outstanding at December 31, 2000. The fair value of these contracts is recorded in the Partnership's balance sheets. The estimated net amount of existing gains currently within other comprehensive income are expected to be reclassified into earnings within the next six months. 3) Long-term Debt On October 25, 2000, the heating oil division completed a refinancing of $40 million of indebtedness incurred under its bank acquisition facility through the issuance of senior notes. The senior notes bear an average interest rate of 8.96% per year, have an average life of five and three- quarter years and are guaranteed by Star Gas Partners. The first maturity date of the senior notes is November 1, 2004 with a final maturity date of November 1, 2010. 9 4) Segment Reporting In accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," the Partnership has four reportable segments, as a retail distributor of heating oil, as a retail distributor of propane, a reseller of natural gas and electricity and as the public master limited partnership, Star Gas Partners. Management has chosen to organize the enterprise under these four segments in order to leverage the expertise it has in each industry, allow each segment to continue to strengthen its core competencies and provide a clear means for evaluation of operating results. The heating oil segment is primarily engaged in the retail distribution of home heating oil, related equipment services, and equipment sales to residential and commercial customers. It operates primarily in the Northeast and Mid-Atlantic states. Home heating oil is principally used by the Partnership's residential and commercial customers to heat their homes and buildings, and as a result, weather conditions have a significant impact on the demand for home heating oil. The propane segment is primarily engaged in the retail distribution of propane and related supplies and equipment to residential, commercial, industrial, agricultural and motor fuel customers, in the Midwest and 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 also have a significant impact on the demand for propane. The natural gas and electric reseller segment is primarily engaged in offering natural gas and electricity to residential consumers in deregulated energy markets. In deregulated energy markets customers have a choice in selecting energy suppliers to power and / or heat their homes. As a result, a significant portion of this segment's revenue is directly related to weather conditions. TG&E operates in nine markets in the Northeast/Mid-Atlantic states where competition for energy suppliers range from independent resellers, like TG&E, to large public utilities. The public master limited partnership segment includes the office of the Chief Executive Officer and has the responsibility for maintaining investor relations and investor reporting for the Partnership. The following are the statements of operations and balance sheets for each segment as of and for the periods indicated. The electric and natural gas reselling segment was added beginning April 7, 2000. There were no inter- segment sales. 10 4) Segment Reporting - (continued)
(in thousands) Three Months Ended --------------------------------------------------------------------------------------------------- December 31, 1999 December 31, 2000 ----------------------------------------- -------------------------------------------------------- Heating Heating Statements of Operations Oil Propane Partners Consol. Oil Propane TG&E Partners Consol. ------------------------ --- ------- -------- ------- --- ------- ---- -------- ------- Sales: Product $123,885 36,655 $ - $160,540 $204,944 $65,649 $ 19,998 $ - $290,591 Installation, service, and appliance 22,448 3,898 - 26,346 27,119 5,794 - - 32,913 -------- ------- ----- -------- -------- ------- -------- -------- -------- Total sales 146,333 40,553 - 186,886 232,063 71,443 19,998 - 323,504 Costs and expenses: Cost of product 68,887 17,659 - 86,546 137,094 39,417 17,875 - 194,386 Cost of installation, service, and appliances 29,512 1,373 - 30,885 34,942 1,974 - - 36,916 Delivery and branch 29,176 11,126 - 40,302 35,677 13,657 - - 49,334 Depreciation and amortization 5,306 3,098 - 8,404 6,273 3,133 239 2 9,647 General and administrative 2,586 1,471 624 4,681 2,390 1,670 1,692 1,141 6,893 TG&E customer acquisition expense - - - - - - 653 - 653 Unit compensation expense - - - - - - - 500 500 Net gain (loss) on sales of assets 3 9 - 12 (13) 24 - - 11 -------- ------- ----- -------- -------- ------- -------- -------- -------- Operating income (loss) 10,869 5,835 (624) 16,080 15,674 11,616 (461) (1,643) 25,186 Interest expense (income), net 4,276 2,199 (2) 6,473 5,164 2,726 526 (299) 8,117 Amortization of debt issuance costs 84 45 - 129 94 51 - - 145 -------- ------- ----- -------- -------- ------- -------- -------- -------- Income (loss) before income taxes 6,509 3,591 (622) 9,478 10,416 8,839 (987) (1,344) 16,924 Income tax expense 75 38 - 113 675 41 - - 716 -------- ------- ----- -------- -------- ------- -------- -------- -------- Income (loss) before cumulative effect of adoption of accounting principle 6,434 3,553 (622) 9,365 9,741 8,798 (987) (1,344) 16,208 Cumulative effect of adoption of accounting principle - - - - 2,093 (229) (398) - 1,466 -------- ------- ----- -------- -------- ------- -------- -------- -------- Net income (loss) $ 6,434 $ 3,553 $(622) $ 9,365 $ 11,834 $ 8,569 $ (1,385) $ (1,344) $ 17,674 ======== ======= ===== ======== ======== ======= ======== ======== ======== Capital expenditures $ 453 $ 1,116 $ - $ 1,569 $ 2,440 $ 1,621 $ 57 $ - $ 4,118 ======== ======= ===== ======== ======== ======= ======== ======== ========
11 4) Segment Reporting - (continued)
(in thousands) September 30, 2000 December 31, 2000 ---------------------------------------------------- ---------------------------------------------------- Heating (1) Heating (1) Balance Sheets Oil Propane TG&E Partners Consol. Oil Propane TG&E Partners Consol. -------------- --- ------- ---- -------- ------- --- ------- ---- -------- ------- Assets Current assets: Cash and cash equivalents $ 6,288 $ 2,765 $ 222 $ 1,635 $ 10,910 $ 5,481 $ 5,557 $ 6,613 $ 634 $ 18,285 Receivables, net 51,475 9,976 5,407 - 66,858 113,587 27,285 12,478 - 153,350 Inventories 21,637 8,636 4,134 - 34,407 31,948 14,629 9,798 - 56,375 Prepaid expenses and other current assets 12,502 1,017 2,157 - 14,815 18,608 3,731 3,488 - 24,965 ------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Total current assets 91,902 22,394 11,920 1,635 126,990 169,624 51,202 32,377 634 252,975 Property and equipment, net 39,026 132,008 266 - 171,300 42,046 135,404 304 - 177,754 Long-term portion of accounts receivable 7,282 - - - 7,282 7,389 - - - 7,389 Investment in subsidiaries - 69,309 - 143,036 - - 85,298 - 179,805 - Intangibles and other assets, net 236,069 63,003 14,174 158 313,404 242,938 63,623 14,082 216 320,859 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Total assets $374,279 $286,714 $ 26,360 $144,829 $618,976 $461,997 $335,527 $ 46,763 $180,655 $758,977 ======== ======== ======== ======== ======== ======== ======== ======== ======== ======== Liabilities and Heating (1) Heating (1) Partners' Capital Oil Propane TG&E Partners Consol. Oil Propane TG&E Partners Consol. --- ------- ---- -------- ------- --- ------- ---- -------- ------- Current Liabilities: Accounts payable $ 11,887 $ 7,436 $ 8,551 $ - $ 27,874 $ 27,637 $ 18,114 $ 15,705 $ - $ 61,456 Working capital facility borrowings 17,000 800 6,600 - 24,400 72,000 10,640 12,293 - 94,933 Current maturities of long-term debt 7,669 8,846 - - 16,515 26,806 3,223 - - 30,029 Accrued expenses and other current liabilities 36,882 4,006 1,521 - 42,410 36,929 9,300 3,753 205 50,187 Due to affiliate (1,115) (3,674) - 4,789 - (2,278) (2,634) (461) 5,373 - Unearned service contract revenue 15,654 - - - 15,654 18,582 - - - 18,582 Customer credit balances 26,101 9,805 2,037 - 37,943 14,298 4,708 2,975 - 21,981 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Total current liabilities 114,078 27,219 18,709 4,789 164,796 193,974 43,351 34,265 5,578 277,168 Long-term debt 186,397 122,154 1,863 - 310,414 178,154 121,577 3,103 - 302,834 Other long-term liabilities 4,495 93 - - 4,588 4,571 97 92 - 4,760 Partners' Capital: Equity Capital 69,309 137,248 5,788 140,040 139,178 85,298 170,502 9,303 175,077 174,215 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Total liabilities and Partners' Capital $374,279 $286,714 $ 26,360 $144,829 $618,976 $461,997 $335,527 $ 46,763 $180,655 $758,977 ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
(1) The consolidated amounts include the necessary entries to eliminate the investment in Petro Holdings, Star Gas Propane and TG&E. 12 5) Acquisitions During the three month period ending December 31, 2000, the Partnership acquired five unaffiliated retail heating oil dealers and three unaffiliated retail propane dealers. The aggregate consideration for these acquisitions accounted for by the purchase method of accounting was approximately $19.6 million. Purchase prices have been allocated to the acquired assets and liabilities based on their respective fair market values on the dates of acquisition. The purchase prices in excess of the fair values of net assets acquired were classified as intangibles in the Condensed Consolidated Balance Sheets. The following table indicates the allocation of the aggregate purchase price paid for these acquisitions and the respective periods of amortization assigned: (in thousands) Useful Lives ------------ Land $ 751 - Buildings 362 30 years Furniture and fixtures 40 10 years Fleet 1,764 5 - 30 years Tanks and equipment 3,069 5 - 30 years Customer lists 7,660 7 - 15 years Restrictive covenants 1,660 5 years Goodwill 3,570 25 years Working capital 745 - ------- Total $19,621 ======= Sales and net income have been included in the Condensed Consolidated Statements of Operations from the respective dates of acquisition. The following pro forma information presents the results of operations for the three months ending December 31, 2000 of the Partnership and the acquisitions previously described, as if the acquisitions had taken place on October 1, 2000. (in thousands, except per share data) Sales $325,945 ======== Net income $ 17,548 ======== General Partner's interest in net income $ 281 ======== Limited Partners' interest in net income $ 17,267 ======== Basic net income per limited partner unit $ 0.86 ======== Diluted net income per limited partner unit $ 0.86 ======== 6) Supplemental Disclosure of Cash Flow Information (in thousands) Three Months Ended December 31, -------------------------------- 1999 2000 ---- ---- Cash paid during the period for: Income taxes $ 3 $ 16 Interest $ 7,897 $10,187 13 7) Earnings Per Limited Partner Units
Three Months Ended (in thousands, except per unit data) December 31, ------------ 1999 2000 ---- ---- Income before cumulative effect of change in accounting principle per Limited Partner unit Basic $ 0.53 $ 0.80 Diluted $ 0.53 $ 0.79 Cumulative effect of change in accounting principle per Limited Partner unit Basic $ - $ 0.07 Diluted $ - $ 0.07 Net income per Limited Partner unit Basic $ 0.53 $ 0.87 Diluted $ 0.53 $ 0.86 Basic Earnings Per Unit: ------------------------ Net income $ 9,365 $17,674 Less: General Partner's interest in net income 174 283 ------- ------- Limited Partner's interest in net income $ 9,191 $17,391 ======= ======= Common Units 14,378 17,052 Senior Subordinated Units 2,477 2,676 Junior Subordinated Units 345 345 ------- ------- Weighted average number of Limited Partner units outstanding 17,200 20,073 ======= ======= Basic earnings per unit $ 0.53 $ 0.87 ======= ======= Diluted Earnings Per Unit: -------------------------- Limited Partners' interest in net income $ 9,191 $17,391 ======= ======= Weighted average number of Limited Partner units outstanding 17,200 20,073 Senior subordinated units anticipated to be issued under employee incentive plan - 113 ------- ------- Diluted number of Limited Partner units 17,200 20,186 ======= ======= Diluted earnings per unit $ 0.53 $ 0.86 ======= =======
8) Subsequent Events Cash Distribution On January 18, 2001, the Partnership announced that it would pay a cash distribution of $0.575 per Unit on all units for the three months ended December 31, 2000. The distributions will be paid on February 14, 2001 to holders of record as of February 5, 2001. Acquisitions On January 16, 2001, the Partnership completed the acquisition of certain assets of a distributor of home heating oil located in New York City, with annual sales of 35.0 million gallons of heating oil and 13.0 million gallons of commercial fuels. On February 2, 2001, the Partnership also completed the acquisition of certain assets of a retail propane distributor, located in the states of Wisconsin, Minnesota, Florida and Georgia, with annual sales of 22.0 million gallons of propane. Equity Offering On January 25, 2001, the Partnership sold 2.2 million Common Units (including the exercise of the over-allotment option) of limited partner interests in a publicly underwritten offering. The offering price was $17.4375 per unit. A portion of the net proceeds will be used to repay $12.1 million of the heating oil operations' revolving acquisition line of credit. The balance of the net proceeds will be used to fund acquisitions, and for the growth capital expenditures. 14 STAR GAS PARTNERS, L.P. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Statement Regarding Forward-Looking Disclosure This Report includes "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act which represent the Partnership's expectations or beliefs concerning future events that involve risks and uncertainties, including those associated with the effect of weather conditions on the Partnership's financial performance, the price and supply of home heating oil, propane, electricity and natural gas and the ability of the Partnership to obtain new accounts and retain existing accounts. All statements other than statements of historical facts included in this Report including, without limitation, the statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere herein, are forward-looking statements. Although the Partnership believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the Partnership's expectations ("Cautionary Statements") are disclosed in this Report, including without limitation and in conjunction with the forward-looking statements included in this report. All subsequent written and oral forward- looking statements attributable to the Partnership or persons acting on its behalf are expressly qualified in their entirety by the Cautionary Statements. Overview In analyzing the financial results of the Partnership, the following matters should be considered. The Total Gas and Electric (TG&E) acquisition was made on April 7, 2000. Accordingly, the results of operations for the three month period ended December 31, 2000 include TG&E's results whereas the results for the previous corresponding quarter do not include TG&E's results. The primary use for heating oil, propane and natural gas is for space heating in residential and commercial applications. As a result, weather conditions have a significant impact on financial performance and should be considered when analyzing changes in financial performance. In addition, gross margins vary according to customer mix. For example, sales to residential customers generate higher profit margins than sales to other customer groups, such as agricultural customers. Accordingly, a change in customer mix can effect gross margins without necessarily impacting total sales. Also, the heating oil, propane and natural gas industries are seasonal in nature with peak activity occurring during the winter months. Accordingly, results of operations for the periods presented are not indicative of the results to be expected for a full year. 15 THREE MONTHS ENDED DECEMBER 31, 2000 COMPARED TO THREE MONTHS ENDED DECEMBER 31, 1999 - ------------------------------------------------ Volume For the three months ended December 31, 2000, retail volume of home heating oil and propane increased 38.8 million gallons, or 28.5%, to 174.9 million gallons, as compared to 136.1 million gallons for the three months ended December 31, 1999. This increase was due to an additional 26.8 million gallons provided by the heating oil segment and a 12.1 million gallon increase in the propane segment. Volume increased in the heating oil and propane segments largely due to the impact of colder temperatures, additional volume provided by acquisitions and as a result of internal growth. Temperatures in the Partnership's areas of operations were an average of 25.3% colder than in the prior year's comparable quarter and 11.0% colder than normal. Sales For the three months ended December 31, 2000, sales increased $136.6 million, or 73.1%, to $323.5 million, as compared to $186.9 million for the three months ended December 31, 1999. This increase was due to an additional $85.7 million provided by the home heating oil segment, $20.0 million of TG&E sales and a $30.9 million increase in the propane segment. Sales rose in both the heating oil and propane segments due to increased selling prices and from increased retail volume. Selling prices increased versus the prior year's comparable period in response to higher supply costs. Sales also increased in the heating oil division by $4.7 million and by $1.9 million in the propane division due to increases in the sales of rationally related products including heating equipment installation and service and water softeners. Cost of Product For the three months ended December 31, 2000, cost of product increased $107.8 million, or 124.6%, to $194.4 million, as compared to $86.5 million for the three months ended December 31, 1999. This increase was due to an additional $68.2 million of cost of product at the home heating segment, $17.9 million of TG&E cost of product and a $21.8 million increase in the propane segment. The cost of product for both the heating oil and propane segments increased due to the impact of higher supply cost and as a result of higher retail volume sales. While selling prices and supply cost increased on a per gallon basis for both the heating oil and propane divisions the increase in selling prices was greater than the increase in supply costs, which resulted in an increase in per gallon margins. Cost of Installation, Service and Appliances For the three months ended December 31, 2000, cost of installation, service and appliances increased $6.0 million, or 19.5%, to $36.9 million, as compared to $30.9 million for the three months ended December 31, 1999. This increase was due to an additional $5.4 million of expenses for the heating oil segment and a $0.6 million increase in cost for the propane segment. The cost of installation, service and appliances for both the heating oil and propane segments increased due to the additional sales of rationally related products and to a lesser extent as a result of additional service cost due to the colder temperatures. 16 Delivery and Branch Expenses For the three months ended December 31, 2000, delivery and branch expenses increased $9.0 million, or 22.4%, to $49.3 million, as compared to $40.3 million for the three months ended December 31, 1999. This increase was due to an additional $6.5 million of delivery and branch expenses at the heating oil segment and a $2.5 million increase in delivery and branch expenses for the propane segment. Delivery and branch expenses increased both at the heating oil and propane segments due to additional operating cost associated with higher retail volume sales, inflation and for additional operating cost of acquired companies. Depreciation and Amortization Expenses For the three months ended December 31, 2000, depreciation and amortization expenses increased $1.2 million, or 14.8%, to $9.6 million, as compared to $8.4 million for the three months ended December 31, 1999. This increase was primarily due to $0.2 million of depreciation and amortization expense for TG&E and additional depreciation and amortization for heating oil and propane acquisitions. General and Administrative Expenses For the three months ended December 31, 2000, general and administrative expenses increased $2.2 million, or 47.3%, to $6.9 million, as compared to $4.7 million for the three months ended December 31, 1999. The increase was due to $1.7 million of TG&E general and administrative expenses and a $0.5 million increase in general and administrative expenses at the Partnership level. The Partnership level increase was primarily due to an accrual for compensation earned for unit appreciation rights previously granted and for professional fees incurred for the recruitment of certain executive positions. TG&E Customer Acquisition Expense For the three months ended December 31, 2000, TG&E customer acquisition expense was $0.7 million. This TG&E segment expense is for the cost of acquiring new accounts through the services of a third party direct marketing company. Unit Compensation Expense For the three months ended December 31, 2000, unit compensation expense was $0.5 million. This expense was incurred under the Partnership's Unit Incentive Plan whereby certain employees and outside directors were granted senior subordinated units as an incentive for increased efforts during employment and as an inducement to remain in the service of the Partnership. Interest Expense, net For the three months ended December 31, 2000, net interest expense increased $1.6 million, or 25.4%, to $8.1 million, as compared to $6.5 million for the three months ended December 31, 1999. This increase was due to additional interest expense for higher working capital borrowings necessitated by the higher cost of product as well as for additional interest expense for the financing of propane and heating oil acquisitions. 17 Income Tax Expense For the three months ended December 31, 2000, income tax expense increased $0.6 million to $0.7 million, as compared to $0.1 million for the three months ended December 31, 1999. This increase was due to additional state income taxes for higher pretax earnings achieved for the three months ended December 31, 2000. Cumulative Effect of Adoption of Accounting Principle For the three months ended December 31, 2000, the Partnership recorded a $1.5 million increase in income arising from the adoption of SFAS No. 133. Net Income For the three months ended December 31, 2000, net income increased $8.3 million, or 88.7%, to $17.7 million, as compared to $9.4 million for the three months ended December 31, 1999. The increase was due to an additional $5.4 million of net income at the heating oil segment and a $5.0 million increase in net income at the propane segment. The improvement in the net income for these segments was due to colder weather, per gallon improvement in gross profit margins and as a result of internal growth. Partially offsetting these increases in net income were $1.4 million of net loss for TG&E and $0.7 million more of net loss at the Partnership level, largely the result of the increase in unit compensation expense recorded at the Partnership level. Earnings before interest, taxes, depreciation and amortization, TG&E customer acquisition expense and unit compensation expense, less net gain (loss) on sales of assets (EBITDA) For the three months ended December 31, 2000, earnings before interest, taxes, depreciation and amortization, TG&E customer acquisition expense and unit compensation expense, less net gain (loss) on sales of assets (EBITDA) increased $11.5 million, or 47.0% to $36.0 million as compared to $24.5 million, for the three months ended December 31, 1999. This increase was due to $5.8 million of additional EBITDA generated by the heating oil segment, $0.4 million of TG&E EBITDA, a $5.8 million increase in the propane segment EBITDA partially offset by $0.5 million of additional expenses at the Partnership level. The increase in the heating oil and propane segments was due to additional EBITDA provided by the impact of colder temperatures, acquisitions, higher per gallon gross profit margins and by internal growth. EBITDA should not be considered as an alternative to net income (as an indicator of operating performance) or as an alternative to cash flow (as a measure of liquidity or ability to service debt obligations), but provides additional information for evaluating the Partnership's ability to make the Minimum Quarterly Distribution. The definition of "EBITDA" set forth above may be different from that used by other companies. 18 Liquidity and Capital Resources During October 2000, the Partnership sold 1.5 million common units (including 0.2 million of overallotment units exercised), the net proceeds of which, net of underwriter's discount, commission, and offering expenses was $23.4 million. These funds combined with net cash provided by $40.4 million in net working capital and acquisition facility borrowings, $40.3 million of long-term debt borrowings ($40.0 million of senior secured notes and $0.3 million of acquisition related notes) and $0.1 million in proceeds from the sale of fixed assets amounted to $104.2 million. Such funds were used for operating activities of $57.5 million, acquisitions of $19.6 million, distributions of $10.7 million, debt repayment of $4.3 million, capital expenditures of $4.1 million and other financing activities of $0.6 million. As a result of the above activity, cash increased by $7.4 million to $18.3 million. The $40.0 million of senior secured notes mentioned above were issued to three institutional lenders by the heating oil segment to complete a refinancing of $40.0 million of indebtedness incurred under its bank acquisition facility. The senior notes bear interest at the rate of 8.96% per year and have an average life of five and three-quarter years with a final maturity date of November 1, 2010. On January 25, 2001, the Partnership sold 2.2 million Common Units (including the exercise of the over-allotment option) of limited partner interests in a publicly underwritten offering. The offering price was $17.4375 per unit. A portion of the net proceeds will be used to repay $12.1 million of the heating oil operations' revolving acquisition line of credit. The balance of the net proceeds will be used to fund acquisitions, and for the growth capital expenditures. For the remainder of fiscal 2001, the Partnership anticipates paying interest of approximately $23 million and anticipates growth and maintenance capital additions of approximately $11 million. In addition, the Partnership plans to pay distributions on its units in accordance with the partnership agreement. The Partnership also plans to pursue strategic acquisitions as part of its business strategy and to prudently fund such acquisitions through a combination of debt and equity. Based on its current cash position, bank credit availability and net cash from operating activities, the Partnership expects to be able to meet all of its obligations for fiscal 2001. 19 Item 3. Quantitative and Qualitative Disclosures About Market Risk ---------------------------------------------------------- The Partnership is exposed to interest rate risk primarily through its bank credit facilities. The Partnership utilizes these borrowings to meet its working capital needs and also to fund the short-term needs of its acquisition program. At December 31, 2000, the Partnership had outstanding borrowings of approximately $105.7 million under its Bank Credit Facilities. In the event that interest rates associated with these facilities were to increase 100 basis points, the impact on future cash flows would be a decrease of approximately $1.1 million annually. The Partnership also selectively uses derivative financial instruments to manage its exposure to market risk related to changes in the current and commodity market price of home heating oil, propane and natural gas. The Partnership does not hold derivatives for trading purposes. The value of market sensitive derivative instruments is subject to change as a result of movements in market prices. Consistent with the nature of hedging activity, associated unrealized gains and losses would be offset by corresponding decreases or increases in the purchase price the Partnership would pay for the product being hedged. Sensitivity analysis is a technique used to evaluate the impact of hypothetical market value changes. Based on a hypothetical ten percent increase in the cost of product at December 31, 2000, the potential unrealized gain on the Partnership's hedging activity would be increased by $3.6 million to an unrealized gain of $5.3 million; and conversely a hypothetical ten percent decrease in the cost of product would be a decrease of $3.5 million to an unrealized loss of $1.8 million. PART II OTHER INFORMATION ------------------------- Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits Included Within: ------------------------- (27) Financial Data Schedule (b) Reports on Form 8-K: -------------------- 10/25/00 This Form 8-K consists of the following historical press release: Star Gas Partners, L.P. Reports Significant EBITDA Improvement in Fiscal 2000 Third Quarter Declares Common Unit Distribution and Announces Commencement of Senior Subordinated Unit Distribution (Released July 25, 2000). 10/27/00 This Form 8-K consists of a copy of the underwriting agreement for a firm commitment public offering of 1,300,000 common units of the registrant that were previously registered pursuant to a shelf registration statement on Form S-3 (SEC File No. 333-94031). 20 SIGNATURE --------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Partnership has duly caused this report to be signed on its behalf of the undersigned thereunto duly authorized: Star Gas Partners, L.P. By: Star Gas LLC (General Partner) Signature Title Date - --------- ----- ---- /s/ George Leibowitz Chief Financial Officer February 8, 2001 ------------------------- George Leibowitz Star Gas LLC (Principal Financial Officer) /s/ James J. Bottiglieri Vice President February 8, 2001 ------------------------- James J. Bottiglieri Star Gas LLC 21
 



5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM STAR GAS PARTNERS, L.P. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2000 AND CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE INTERIM PERIOD OCTOBER 1, 2000 THROUGH DECEMBER 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0001002590 STAR GAS PARTNERS, L.P. 1,000 3-MOS SEP-30-2000 OCT-01-2000 DEC-31-2000 18,285 0 156,795 3,445 56,375 252,975 231,968 54,214 758,977 277,168 302,834 0 0 174,215 0 758,977 290,591 323,504 194,386 231,302 65,824 1,337 8,117 16,924 716 16,208 0 0 1,466 17,674 .87 .86