SGU

Business Context and Reporting Period

Company: Star Gas Partners, L.P. (a Master Limited Partnership)

Reporting Period: Three months ended December 31, 2000 (Q3 Fiscal 2001)

Business Overview: The Partnership operates as a diversified home energy distributor and services provider through four segments: heating oil (Petro Holdings), propane (Star Gas Propane), natural gas and electricity reselling (Total Gas & Electric or TG&E), and the general partnership. TG&E was acquired on April 7, 2000, making its results non-comparable to the prior year quarter.

Key Financial Metrics

Note: EBITDA is defined by management as earnings before interest, taxes, depreciation, amortization, TG&E customer acquisition expense, and unit compensation expense, less net gain/loss on asset sales.

Material Changes vs. Prior Period

• Revenue Growth: Sales increased 73.1% ($136.6 million) driven by the inclusion of TG&E ($20.0 million), colder weather (25.3% colder than prior year), and acquisitions. Retail volume increased 28.5% to 174.9 million gallons.
• Profitability: Net income rose 88.7% to $17.7 million. Despite higher supply costs, selling price increases outpaced cost increases, improving per-gallon margins in heating oil and propane segments.
• Cost Structure: Cost of product surged 124.6% to $194.4 million due to higher volumes and supply costs. Operating expenses increased across delivery, branch, and general/administrative categories, partly due to TG&E integration and acquisition-related costs.
• Accounting Change: Adoption of SFAS No. 133 (Derivatives) resulted in a one-time net income increase of $1.5 million and a $6.3 million unrealized loss recorded in other comprehensive income.
• Acquisitions: The Partnership spent $19.6 million acquiring five heating oil dealers and three propane dealers during the quarter.

Guidance, Outlook, and Risks

• Capital Resources: The Partnership raised $23.4 million in October 2000 and $40.3 million in long-term debt to fund operations and acquisitions. A subsequent equity offering of 2.2 million units was completed in January 2001.
• Future Obligations: Management anticipates approximately $23 million in interest payments and $11 million in capital additions for the remainder of fiscal 2001.
• Market Risks:
  • Weather: Financial performance is highly sensitive to weather conditions due to the seasonal nature of heating fuel demand.
  • Commodity Prices: Exposure to volatile prices for oil, propane, and natural gas. The Partnership uses derivatives to hedge, but unrealized gains/losses impact comprehensive income.
  • Interest Rates: A 100 basis point increase in interest rates on $105.7 million of credit facility borrowings would reduce annual cash flow by approximately $1.1 million.
• Contingencies: The filing includes standard forward-looking statement disclaimers regarding the ability to retain accounts and obtain new business.

Investor Verification Checklist

• Weather Impact: Verify the correlation between the reported 25.3% colder temperatures and the volume increase to assess sustainability of Q3 results.
• TG&E Performance: Review the specific contribution of the TG&E segment, which reported a net loss of $1.4 million in the quarter, to understand its drag on overall profitability.
• Debt Refinancing: Confirm the terms of the $40 million senior notes issued in October 2000 (8.96% interest rate) and their impact on future interest coverage.
• Derivative Accounting: Assess the impact of SFAS No. 133 adoption on future earnings volatility, specifically the reclassification of the $3.9 million accumulated other comprehensive income into earnings over the next six months.
• Acquisition Integration: Monitor the integration costs and revenue realization from the $19.6 million in acquisitions completed during the quarter.