UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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 September 30, 1996
------------------
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: 2-88526
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PETROLEUM HEAT AND POWER CO., INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Minnesota 06-1183025
- ---------------------------------- -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2187 Atlantic Street, Stamford, CT 06902
- ---------------------------------- -----------------
(Address of principal executive Offices) (Zip Code)
Registrant's telephone number, including area code: (203) 325-5400
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________________________________________________________________________________
(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
--- ---
As of September 30, 1996 there were 23,020,597 shares of the Registrant's Class
A Common Stock, 11,228 shares of the Registrant's Class B Common Stock and
2,597,519 shares of the Registrant's Class C Common Stock outstanding.
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
INDEX TO Form 10-Q
Page
----
Part 1 Financial Information:
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets
September 30, 1996 and December 31, 1995 3
Condensed Consolidated Statements of Operations for the
Three Months Ended
September 30, 1996 and September 30, 1995
and the Nine Months Ended
September 30, 1996 and September 30, 1995 4
Condensed Consolidated Statement of Changes in Stockholders'
Equity (Deficiency) for the Nine Months Ended
September 30, 1996 5
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended
September 30, 1996 and September 30, 1995 6 - 7
Notes to Condensed Consolidated Financial Statements 8 - 10
Item 2 - Management's Discussion and Analysis of
Financial Conditions and Results of Operations 11 - 18
Part 2 Other Information:
Item 6 - Exhibits and reports on Form 8-K 19
Signature 20
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except per share data)
September 30, December 31,
Assets 1996 1995
----------- ---------
Current assets:
Cash and cash equivalents $ 25,223 $ 78,285
Restricted cash 3,000 6,000
Accounts receivable (net of allowance of $1,970
and $969) 57,129 95,361
Inventories 14,888 20,413
Prepaid expenses 6,761 6,115
Notes receivable and other current assets 1,541 1,617
--------- ---------
Total current assets 108,542 207,791
--------- ---------
Property, plant and equipment - net 29,273 30,263
--------- ---------
Intangible assets (net of accumulated amortization
of $282,223 and $264,456)
Customer lists 78,838 76,419
Deferred charges and pension costs 25,168 27,296
--------- ---------
104,006 103,715
--------- ---------
Investment in and advances to the Star Gas Partnership 8,642 14,648
--------- ---------
Other assets 911 824
--------- ---------
$ 251,374 $ 357,241
========= =========
Liabilities and Stockholders' Equity (Deficiency)
Current liabilities:
Current debt $ 3,089 $ 47,001
Current maturities of cumulative redeemable
exchangeable preferred stock 4,167 4,167
Accounts payable 8,659 22,824
Customer credit balances 24,724 19,610
Unearned service contract revenue 13,898 15,535
Accrued expenses and other liabilities 28,851 33,246
--------- ---------
Total current liabilities 83,388 142,383
--------- ---------
Supplemental benefits and other liabilities 1,590 1,658
--------- ---------
Pension plan obligation 7,155 7,174
--------- ---------
Notes payable and other long-term debt 17,093 17,779
--------- ---------
Senior notes payable 34,150 35,200
--------- ---------
Subordinated notes payable 240,400 241,450
--------- ---------
Cumulative redeemable exchangeable preferred stock 8,333 12,500
--------- ---------
Common stock redeemable at option of stockholder 1,280 1,280
--------- ---------
Note receivable from stockholder (1,280) (1,280)
--------- ---------
Stockholders' equity (deficiency):
Class A common stock-par value $.10 per share;
40,000 shares authorized, 22,859 and 22,653
shares outstanding 2,286 2,266
Class B common stock-par value $.10 per share; 6,500
shares authorized, 11 and 14 shares outstanding 1 1
Class C common stock-par value $.10 per share; 5,000
shares authorized, 2,558 shares outstanding 256 256
Additional paid-in capital 78,150 76,418
Deficit (216,556) (174,972)
Minimum pension liability adjustment (4,872) (4,872)
--------- ---------
Total stockholders' equity (deficiency) (140,735) (100,903)
--------- ---------
$ 251,374 $ 357,241
========= =========
See accompanying notes to condensed consolidated financial statements.
- 3 -
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share data) Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1996 1995 1996 1995
-------- -------- --------- ---------
Net sales $ 51,060 $ 63,541 $ 422,060 $ 404,917
Cost of sales 44,854 47,768 293,064 256,342
-------- -------- --------- ---------
Gross profit 6,206 15,773 128,996 148,575
Selling, general and administrative expenses 24,909 31,426 76,863 93,503
Direct delivery expense 3,503 4,964 23,652 25,135
Restructuring charges -- -- 1,150 --
Corporate identity expenses 1,336 -- 2,128 --
Amortization of customer lists 4,561 4,843 14,090 15,539
Depreciation of plant and equipment 1,664 3,281 5,053 9,003
Amortization of deferred charges 989 1,631 3,677 4,659
Provision for supplemental benefits 218 368 655 1,039
-------- -------- --------- ---------
Operating income (loss) (30,974) (30,740) 1,728 (303)
Other income (expense):
Interest expense (8,440) (10,318) (26,007) (30,434)
Interest income 647 577 1,896 1,983
Other (10) 20 1,837 743
-------- -------- --------- ---------
Loss before income taxes,
equity interest and extraordinary item (38,777) (40,461) (20,546) (28,011)
Income taxes (benefit) (50) (75) 350 300
-------- -------- --------- ---------
Loss before equity interest
and extraordinary item (38,727) (40,386) (20,896) (28,311)
Share of loss of Star Gas Partnership (1,866) -- (394) --
-------- -------- --------- ---------
Loss before extraordinary item (40,593) (40,386) (21,290) (28,311)
Extraordinary item-loss on early
extinguishment of debt -- -- (6,414) (1,436)
-------- -------- --------- ---------
Net loss $(40,593) $(40,386) $ (27,704) $ (29,747)
======== ======== ========= =========
Net loss applicable to common stock $(41,788) $(41,879) $ (30,093) $ (33,010)
Loss before extraordinary item per
common share:
Class A Common Stock $ (1.63) $ (1.65) $ (.93) $ (1.25)
Class B Common Stock -- -- -- --
Class C Common Stock (1.63) (1.65) (.93) (1.25)
Extraordinary (loss) per common share:
Class A Common Stock $ -- $ -- $ (.25) $ (.06)
Class B Common Stock -- -- -- --
Class C Common Stock -- -- (.25) (.06)
Net loss per common share:
Class A Common Stock $ (1.63) $ (1.65) $ (1.18) $ (1.31)
Class B Common Stock -- -- -- --
Class C Common Stock (1.63) (1.65) (1.18) (1.31)
Cash dividends declared per common share:
Class A Common Stock $ .15 $ .15 $ .45 $ .45
Class B Common Stock -- -- -- --
Class C Common Stock .15 .15 .45 .45
Weighted average number of common shares
outstanding:
Class A Common Stock 23,021 22,855 22,939 22,656
Class B Common Stock 12 15 13 16
Class C Common Stock 2,598 2,598 2,598 2,598
See accompanying notes to condensed consolidated financial statements.
- 4 -
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Changes in Stockholders' Equity (Deficiency)
(Unaudited)
Nine Months Ended September 30, 1996
(In thousands)
Common Stock
------------------------------------------------------
Class A Class B Class C Minimum
------------------------------------------------------ Additional Pension
No. Of No. Of No. Of Paid-In Liability
Shares Amount Shares Amount Shares Amount Capital Deficit Adjustment Total
------ ------ ------ ------ ------ ------ ------- ------- ---------- -----
Balance at December 31, 1995 22,653 $ 2,266 14 $ 1 2,558 $ 256 $76,418 ($174,972) ($4,872) ($100,903)
Net income (27,704) (27,704)
Cash dividends declared
and paid (10,037) (10,037)
Cash dividends payable (3,843) (3,843)
Repurchase of Class B
Common Stock (3) (--) (39) (39)
Class A shares issued under the
Dividend Reinvestment Plan 206 20 1,409 1,429
Stock option compensation 362 362
------- -------- ----- ------- ----- ----- ------- --------- ------- ---------
Balance at September 30, 1996 22,859 $ 2,286 11 $ 1 2,558 $ 256 $78,150 ($216,556) ($4,872) ($140,735)
======= ======== ===== ======= ===== ===== ======= ========= ======= =========
See accompanying notes to condensed consolidated financial statements.
- 5 -
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
(In thousands) September 30,
-----------------
1996 1995
---- ----
Cash flows from (used in) operating activities:
Net loss $(27,704) $(29,747)
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:
Amortization of customer lists 14,090 15,539
Depreciation of plant and equipment 5,053 9,003
Amortization of deferred charges 3,677 4,659
Share of loss of Star Gas Partnership 394 --
Provision for losses on accounts receivable 1,295 1,575
Provision for supplemental benefits 655 1,039
Loss on early extinguishment of debt 6,414 1,436
Gain on sale of business (1,801) (788)
Other (54) 26
Change in operating assets and liabilities,
net of effects of acquisitions and dispositions:
Decrease in accounts receivable 36,937 34,675
Decrease (increase) in inventory 5,525 (974)
Increase in other current assets (570) (3,322)
Increase in other assets (87) (553)
Decrease in accounts payable (14,165) (8,256)
Increase in customer credit balances 5,114 7,229
Decrease in unearned service contract revenue (1,637) (356)
Decrease in accrued expenses (4,374) (6,187)
-------- --------
Net cash provided by operating activities 28,762 24,998
-------- --------
Cash flows from (used in) investing activities:
Acquisitions (22,045) (17,516)
Capital expenditures (4,052) (8,106)
Proceeds from sale of business 4,073 1,477
Net proceeds from sales of fixed assets 395 308
Minimum quarterly distributions from Star
Gas Partnership 2,936 --
-------- --------
Net cash used in investing activities (18,693) (23,837)
-------- --------
See accompanying notes to condensed consolidated financial statements.
- 6 -
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
(In thousands) September 30,
-----------------
1996 1995
---- ----
Cash flows from (used in) financing activities:
Net proceeds from issuance of common stock 1,429 18,516
Net proceeds from issuance of subordinated notes -- 120,350
Repayment of notes payable (1,050) (80,372)
Redemption of preferred stock (4,167) (24,133)
Repurchase of common stock (39) (13,709)
Repurchase of subordinated notes (49,612) --
Credit facility borrowings 29,000 --
Credit facility repayments (29,000) (5,100)
Decrease in restricted cash 3,000 --
Cash dividends paid (13,859) (14,382)
Other 1,167 (1,565)
-------- ---------
Net cash provided by (used in) financing activities (63,131) (395)
-------- ---------
Net increase (decrease) in cash (53,062) 766
Cash at beginning of year 78,285 15,474
-------- ---------
Cash at end of period $ 25,223 $ 16,240
======== =========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest $ 29,528 $ 27,131
Income taxes 231 3,142
Non-cash investing activity:
Acquisitions -- (8,000)
Non-cash financing activity:
Issuance of note payable -- 8,000
See accompanying notes to condensed consolidated financial statements
- 7 -
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
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 results for the interim periods.
The results of operations for the nine months ended September 30, 1996 are
not necessarily indicative of the results to be expected for the full year.
2. Per Share Data
Net income (loss) per common shares are computed utilizing the three class
method based upon the weighted average number of shares of Class A Common
Stock, Class B Common Stock and Class C Common Stock outstanding after
adjusting net income (loss) for preferred dividends declared aggregating
$2,389,000 and $3,263,000 for the nine months ended September 30, 1996 and
1995 respectively. Fully diluted net income (loss) per common shares are
not presented because the effect is not material.
3. Acquisitions / Sale
During the nine month period ending September 30, 1996, the Company
acquired the customer lists and equipment of six unaffiliated fuel oil
dealers. The aggregate consideration for these acquisitions, accounted for
by the purchase method, was approximately $20.8 million. Sales and net
income of the acquired companies are included in the consolidated statement
of income from the respective dates of acquisition.
In June 1996, the Company sold its Springfield Massachusetts operations to
an unaffiliated fuel oil dealer. The Company received proceeds of
approximately $4.1 million and realized a gain on this transaction of
approximately $1.8 million.
Had these acquisitions and disposal occurred at the beginning of the
period, the pro forma unaudited results of operations for the nine months
ended September 30, 1996 would have been as follows:
(In thousands, Except Per Share)
--------------------------------
Net sales $ 422,917
Net loss before extraordinary loss (21,972)
Net loss (28,386)
Net loss per common share:
Class A Common Stock $ (1.21)
Class B Common Stock --
Class C Common Stock $ (1.21)
- 8 -
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
4. Segment Information
From December 8, 1994 to December 19, 1995 the operations, assets and
liabilities of Star Gas Corporation ("Star Gas"), a wholly owned
subsidiary, were included in the consolidated financial statements of the
Company. Accordingly, for the nine months ended September 30, 1995, the
Company's operations were classified into two business segments: Home
Heating Oil and Propane. However, as a result of the Star Gas Master
Limited Partnership transaction in December 1995 involving the conveyance
of the Company's propane operations to Star Gas Propane, L.P., a minority
owned entity, for the nine and three months ended September 30, 1996 the
Company had no propane revenues or expenses.
Nine Months Ended Nine Months Ended
September 30, 1996 September 30, 1995
------------------ ------------------
Home Home
Heating Heating
Oil Propane* Consolidated Oil Propane Consolidated
--- -------- ------------ --- ------- ------------
Net Sales $422,060 $-- $422,060 $ 333,044 $ 71,873 $ 404,917
Gross Profit 128,996 -- 128,996 110,041 38,534 148,575
Operating Expenses 103,793 -- 103,793 88,605 30,033 118,638
Depreciation and
Amortization 23,475 -- 23,475 23,106 7,134 30,240
Operating Income 1,728 -- 1,728 (1,670) 1,367 (303)
Assets 251,374 -- 251,374 224,102 150,989 375,091
Capital Expenditures 4,052 -- 4,052 2,795 5,311 8,106
* For the nine months ended September 30, 1996 the Propane operations had
equity loss, which is presented in the Statement of Operations as
non-operating loss, of approximately $0.4 million representing the
Company's share of loss of Star Gas Partners, L.P.
Three Months Ended Three Months Ended
September 30, 1996 September 30, 1995
------------------ ------------------
Home Home
Heating Heating
Oil Propane** Consolidated Oil Propane Consolidated
--- --------- ------------ --- ------- ------------
Net Sales $51,060 $-- $51,060 $46,716 $16,825 $ 63,541
Gross Profit 6,206 -- 6,206 7,008 8,765 15,773
Operating Expenses 29,748 -- 29,748 26,503 9,887 36,390
Depreciation and
Amortization 7,432 -- 7,432 7,615 2,508 10,123
Operating Loss (30,974) -- (30,974) (27,110) (3,630) (30,740)
** For the three months ended September 30, 1996 the Propane operations had
equity loss, which is presented in the Statement of Operations as
non-operating loss, of approximately $1.9 million representing the
Company's share of loss of Star Gas Partners, L.P.
- 9 -
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
5. Restructuring Charges
Under the guidance of the Chief Operating Officer and a leading consulting
firm, a major strategic study aimed at improving the Company's
organizational and marketing effectiveness and financial performance was
completed in late 1995. The study provided management with certain
recommendations regarding improvements in structure, training and
technology. The Company utilized the relatively less operationally
demanding non-heating season period from April to September to implement
the study's recommendations.
As part of the implementation program, Petro undertook certain business
improvement strategies in its Long Island, New York region. These steps
included the consolidation of the region's five home heating oil branches
into one central customer service center and three depots. The regional
customer service center has accounting, credit, customer service and sales
functions consolidated into a single, new facility in central Long Island.
All external communications and marketing previously undertaken in the five
branches have been centralized into this one location freeing the three
newly configured depots to focus on oil delivery and heating equipment
repair, maintenance and installation, in mutually exclusive operating
territories.
In April 1996, after finalizing all aspects of this plan the Company
formally announced to the employees its intention to restructure certain
aspects of its Long Island, New York operations and recorded a
restructuring charge of $1.2 million in the second quarter of 1996. These
charges included accruals and actual cash expenditures of $0.5 million for
severance and outplacement of employees displaced by the plan, $0.6 million
for lease payments remaining on non-cancelable non-strategic facilities,
and $0.1 million for the write-off and disposal of certain equipment not
compatible with equipment in the new region, along with other expenses
directly related to the restructuring plan.
- 10 -
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS
Overview
In analyzing Petro's results for the nine-month and three-month periods ended
September 30, 1996, one should consider the seasonal nature of the Company's
business, which results in the sale by the Company of approximately 50% of its
annual volume of fuel oil in the first quarter, 30% in the fourth quarter, and
20% in the second and third quarters combined. Unlike this pattern of
distribution, however, many of the Company's costs are incurred evenly
throughout the year, resulting in non-heating season operating and net losses.
In addition, as a result of the conversion of Star Gas Corporation into a Master
Limited Partnership (the "Star MLP", described more fully in the Company's 1995
10-K), Petro's nine months ended September 30, 1996 and third quarter 1996
results account for Star Gas' performance on an equity basis. In contrast,
Petro's nine months ended September 30, 1995 and third quarter 1995 results
include what had historically been the Company's propane operations, including
Star Gas, on a consolidated basis. In an effort to make the following discussion
more meaningful, the analysis of operating results primarily compares Petro's
home heating oil results for the two periods.
Nine Months Ended September 30, 1996
Compared to Nine Months Ended September 30, 1995
Volume. Home heating oil volume increased 18.9% to 322.8 million gallons for the
nine months ended September 30, 1996, as compared to 271.5 million gallons for
the nine months ended September 30, 1995. This increase was largely due to 12.8%
colder weather than in the previous year, as temperatures were slightly colder
than normal (4.3%) in the first nine months of 1996, in contrast to the warmer
than normal weather experienced during the first nine months of 1995. In
addition, heating oil volumes were favorably impacted by the inclusion of
gallonage from the Company's sixteen heating oil acquisitions completed since
the beginning of the first quarter of last year. Total retail gallons decreased
2.3% from the first nine months of 1995 to the first nine months of 1996, as
propane volume, which amounted to 58.8 million gallons in the first nine months
of 1995, was not included in Petro's 1996 financials as a result of the Star
MLP.
Net sales. Home heating oil net sales for home heating oil operations increased
26.7% to $422.1 million for the nine months ended September 30, 1996, as
compared to $333.0 million for the nine months ended September 30, 1995. This
growth was due both to increased volume and to higher selling prices associated
with the significant increases in wholesale product costs during fiscal 1996.
Total sales combined increased only 4.2% from the first nine months of 1995 to
the first nine months of 1996, as propane sales, which amounted to $71.9 million
in the first nine months of 1995, were excluded from Petro's 1996 financials as
a result of the Star MLP.
- 11 -
Gross profit. Home heating oil gross profit increased 17.2% to $129.0 million
for the nine months ended September 30, 1996, as compared to $110.0 million for
the nine months ended September 30, 1995. The growth in gross profit resulting
from the increased volume was partially offset by an unusual decline in home
heating oil margins, caused by significant and rapid increases in supply costs
and the effect of record winter storms in 1996 on net service expense, which is
included in the Company's calculation of gross profit. While in previous years
the Company has been able to quickly respond to supply cost increases by raising
selling prices, the sudden and substantial increases in wholesale prices
occurring in 1996 hindered the Company's ability to maintain and increase its
margin. Total gross profit declined 13.2% from the first nine months of 1995 to
the first nine months of 1996, as propane gross profit, which amounted to $38.5
in the first nine months of 1995, was not included in Petro's 1996 financials as
a result of the Star MLP.
Selling, general and administrative expenses. Home heating oil selling, general
and administrative expenses increased 10.6% to $76.9 million for the nine months
ended September 30, 1996, as compared to $69.5 million for the nine months ended
September 30, 1995. On a per gallon basis, costs were 7.0% lower, despite the
impact of inflationary pressures and the effect of heavy winter storms in the
first quarter of 1996, which impacted branch expenses in the first nine months
of 1996 by an estimated $0.5 million. This improvement was due to the Company's
ongoing efforts in creating greater operational efficiencies and instituting
better controls in all major expense categories. Total selling, general and
administrative expenses decreased 17.8% from the first nine months of 1995 to
the first nine months of 1996, as propane expenses, which amounted to $24.0
million in the first nine months of 1995, were excluded from Petro's 1996
financials as a result of the Star MLP.
Direct delivery expenses. Home heating oil direct delivery expenses increased
23.9% to $23.7 million for the nine months ended September 30, 1996, as compared
to $19.1 million for the nine months ended September 30, 1995. In addition to
the growth in volume delivered, this increase was also a result of the severe
winter snow storms, which impacted delivery productivity and required the
Company to pay extraordinary overtime and retain additional temporary personnel.
Excluding the estimated $1.0 million effect of the storms, delivery expenses
remained unchanged on a per gallon basis despite inflationary pressures. Total
direct delivery expenses decreased 5.9% from the first nine months of 1995 to
the first nine months of 1996, as propane delivery expenses, which amounted to
$6.0 million in the first nine months of 1995, were not included in Petro's 1996
financials as a result of the Star MLP.
Restructuring charges. Restructuring charges for the nine months ended September
30, 1996 were $1.2 million. These charges represent costs associated with the
Company's regionalization and consolidation of its five full function Long
Island branches into one regional customer service center and three
geographically optimal delivery and service depots. The customer service center
began operation during May of 1996 and represents the first stage of
implementation of the recommendation of an operational effectiveness study
conducted by a nationally recognized consulting firm and senior Company
management in 1995.
Corporate identity expenses. Corporate identity expenses for the nine months
ended September 30, 1996 were $2.1 million. These expenses represent costs
associated with the company's brand identity program in Long Island, and include
the painting of over 400 delivery and service vehicles in the region. Through
this program, the Company is seeking to build significant brand equity by
marketing its services throughout the region under the "Petro" brand name,
rather than the twelve previously in use. These expenses are expected to
approximate a total of $2.5 million over the course of fiscal year 1996.
- 12 -
Amortization of customer lists. Amortization of home heating oil customer lists
increased 1.9% to $14.1 million for the nine months ended September 30, 1996, as
compared to $13.8 million for the nine months ended June 30, 1995 due to the
Company's recent acquisitions, which were partially offset by the impact of
certain customer lists becoming fully amortized. Total amortization of customer
lists decreased 9.3% from the first nine months of 1995 to the first nine months
of 1996, as propane customer list amortization, which amounted to $1.7 million
in the first nine months of 1995, was not included in Petro's 1996 financials as
a result of the Star MLP.
Depreciation of plant and equipment. Depreciation of home heating oil plant and
equipment increased 17.9% to $5.1 million for the nine months ended September
30, 1996, as compared to $4.3 million for the nine months ended September 30,
1995 as a result of the Company's recent fixed asset additions associated with
acquisitions, which outpaced the impact of certain assets becoming fully
depreciated. Total depreciation of plant and equipment decreased 43.9% from the
first nine months of 1995 to the first nine months of 1996, as propane-related
depreciation, which amounted to $4.7 million in the first nine months of 1995,
was eliminated from Petro's 1996 financials as a result of the Star MLP.
Amortization of deferred charges. Amortization of home heating oil deferred
charges decreased 7.2% to $3.7 million for the nine months ended September 30,
1996, as compared to $4.0 million for the nine months ended September 30, 1995
as a result of certain deferred items becoming fully amortized. Total
amortization of deferred charges decreased from $4.7 million for the first nine
months of 1995 to $3.7 million for the first nine months of 1996, as the impact
of propane-related amortization of deferred charges, which amounted to $0.7
million in the first nine months of 1995, was not included in Petro's 1996
financials as a result of the Star MLP.
Provision for supplemental benefits. Provision for supplemental benefits
declined to $0.7 million for the nine months ended September 30, 1996, as
compared to $1.0 million for the nine months ended June 30, 1995. These
supplemental benefits reflect the extension of the exercise date of certain
options previously issued, and the change in provision is due to a reduction of
the accrual required under the vesting schedule of those options.
Operating income. Home heating oil operating income increased to $1.7 million
for the nine months ended September 30, 1996, as compared to an operating loss
of $1.7 million for the nine months ended September 30, 1995. This increase was
largely a result of higher volume and the improvement in per gallon operating
costs, and was achieved despite the decline in gross profit margins caused by
the rapid rise in product costs, the effect of the record snow storms, and the
restructuring and corporate identity charges. Total operating income also
increased $2.0 million, despite the non-consolidation of Star's operating income
which, for the first nine months of 1995, contributed $1.4 million.
Net interest expense. Net interest expense declined 15.3% to $24.1 million for
the nine months ended September 30, 1996, as compared to $28.5 million for the
nine months ended September 30, 1995. This decrease was due to the decline in
average borrowings versus the prior period resulting from the application of
proceeds from the Star MLP to debt repayment.
Other income. Other income increased from $0.7 million for the nine months ended
September 30, 1995 to $1.8 million for the nine months ended September 30, 1996,
reflecting the sale of the Company's Springfield, Massachusetts heating oil
operations during the second quarter of 1996 and New Hampshire heating oil
operations during the first quarter of 1995.
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Equity in earnings of Star Gas Partnership. Share of losses of Star Gas
Partnership were $0.4 million for the nine months ended September 30, 1996. For
the nine months ended September 30, 1995, Star Gas' results were consolidated
with the Company's. Through the third quarter of 1996, the Company had received
$2.9 million in distributions from Star Gas, reflecting the Company's
subordinate and general partnership interest for the period of December 20, 1995
to June 30 1996.
Income before extraordinary items. Income before extraordinary items improved
24.8% to a loss of $21.3 million for the nine months ended September 30, 1996,
as compared to a loss of $28.3 million for the nine months ended September 30,
1995. This improvement was due to the $4.3 million reduction in interest
expense, the $3.4 million increase in heating oil operating income and the $1.1
million increase in other income. Partially offsetting these gains was the
elimination of Star's $1.4 million of operating income in the first nine months
of 1995, and the recorded loss in earnings of Star Gas Corporation of $0.4
million for the first nine months of 1996.
Extraordinary item - loss on early extinguishment of debt. In February 1996, the
Company recorded an extraordinary charge of $6.4 million in connection with the
retirement of $43.8 million of 12.25% subordinated debentures due 2005. This
amount includes both a prepayment premium of $4.8 million and a write-off of
deferred charges of $1.6 million associated with the issuance of that debt.
Net income. Net income improved 6.9% to a loss of $27.7 million for the nine
months ended September 30, 1996, as compared to a loss of $29.7 million for the
nine months ended September 30, 1995. This increase was despite the
extraordinary item described above, and was due to improvements in core business
heating oil operating income, net interest expense and other income.
EBITDA*. Home heating oil EBITDA increased 17.6% to $25.2 million for the nine
months ended September 30, 1996, as compared to $21.4 million for the nine
months ended June 30, 1995. This gain resulted from increased volume and
improved per gallon operating expense performance, and was despite the impact of
the restructuring and corporate identity costs. Excluding these one-time costs,
heating oil EBITDA increased 32.9% to $28.5 million. Total EBITDA decreased
15.8% from the first nine months of 1995 to the first nine months of 1996, as
the impact of propane EBITDA, which amounted to $8.5 million in the first nine
months of 1995, was eliminated from Petro's 1996 financials as a result of the
Star MLP.
NIDA**. NIDA increased to $3.8 million for the nine months ended September 30,
1996, as compared to a $0.5 million loss for the nine months ended September 30,
1995. Excluding the one-time restructuring and corporate identity costs, NIDA
increased to $7.1 million. The Company was able to achieve this increase despite
the non-consolidation of Star Gas, which contributed $8.5 million of EBITDA in
the first nine months of 1995, due both to the improvement in heating oil EBITDA
and other income and to the reduction in net interest expense.
- ----------
* EBITDA is defined as operating income before depreciation and amortization,
non-cash charges relating to the grant of stock options to executives of the
Company, and the amount of non-cash expenses associated with key employees'
deferred compensation plans.
** NIDA is the Company's measure of cash flow and is defined as net income
(loss) before extraordinary items, plus depreciation, amortization, non-cash
charges relating to the grant of stock options to executives of the Company,
non-cash charges associated with deferred compensation plans and other non-cash
charges of a similar nature, if any, less dividends accrued on preferred stock,
excluding net income (loss) derived from investments accounted for by the equity
method, except to the extent of any cash dividends received by the Company.
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Three Months Ending September 30, 1996
Compared to Three Months Ending September 30, 1995
Volume: Retail home heating oil volume increased 6.1% to 28.6 million gallons
for the three months ended September 30, 1996, as compared to 26.9 million
gallons for the three months ended September 30, 1995. This increase was
primarily due to the Company's acquisition of fourteen heating oil companies
since the beginning of the third quarter of last year. Total retail gallons
decreased 28.7% from the third quarter of 1995 to the third quarter of 1996, as
propane volume, which amounted to 13.2 million gallons in the third quarter of
1995 was not included in Petro's 1996 financials as a result of the Star MLP.
Net Sales: Home heating oil net sales increased 9.3% to $51.1 million for the
three months ended September 30, 1996, as compared to $46.7 million for the
three months ended September 30, 1995. This increase was due to increased volume
and to higher selling prices driven by increased wholesale product costs. Total
sales decreased 19.6% from the third quarter of 1995 to the third quarter of
1996, as propane sales, which amounted to $16.8 million in the third quarter of
1995, were not included in Petro's 1996 financials as a result of the Star MLP.
Gross Profit: Home heating oil gross profit decreased 11.4% to $6.2 million for
the three months ended September 30, 1996, as compared to $7.0 million for the
three months ended September 30, 1995. This decrease in gross profit was due
primarily to the unexpected decrease in heating oil margins caused by the recent
sharp rise in product costs. Based on third quarter 1996 volumes, the impact of
this unusual margin decline is approximately $0.8 million. While, as noted in
the nine month discussion, the Company has historically been able to quickly
pass increased product costs through in its retail prices, the Company elected,
for marketing purposes, to not meet the rapid cost increase with similar price
increases in the third quarter. Total gross profit declined $9.6 million from
the third quarter of 1995 to the third quarter of 1996, as propane gross profit,
which amounted to $8.8 million in the third quarter of 1995, was not included in
Petro's 1996 financials as a result of the Star MLP.
Selling, General and Administrative Expenses. Home heating oil selling, general,
and administrative expenses increased 6.6% to $24.9 million for the three months
ended September 30, 1996, as compared to $23.4 million for the three months
ended September 30, 1995. This increase included a 10.8% increase in marketing
expense, which contributed to a 13.4% improvement in customer gains in the third
quarter of 1996 as compared to the third quarter of 1995. Total selling, general
and administrative expenses declined 20.7% from the third quarter of 1995 to the
third quarter of 1996, as propane expenses, which amounted to $8.1 million in
the third quarter 1995, were excluded from Petro's 1996 financials as a result
of the Star MLP.
Direct Delivery Expense. Home heating oil direct delivery expenses increased
11.9% to $3.5 million for the three months ended September 30, 1996, as compared
to $3.1 for the three months ended September 30, 1995. This increase is directly
related to the increase in volume for the three months ended September 30, 1996,
as well as to the timing of certain expenses. Total direct delivery expenses
declined 29.4% from the third quarter of 1995 to the third quarter of 1996, as
propane delivery expenses, which amounted to $1.8 million in the third quarter
of 1995, were not included in Petro's 1996 financials as a result of the Star
MLP.
Corporate Identity Expenses: Corporate identity expenses for the three month
period ended September 30, 1996 were $1.3 million. These expenses represent
costs associated with the Company's brand identity program in Long Island as
described in the nine month discussion.
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Amortization of Customer Lists: Home heating oil amortization of customer lists
remained relatively unchanged at $4.5 million for the three months ended
September 30, 1996, as the impact of the Company's recent acquisitions offset
the effect of certain customer lists becoming fully amortized. Total
amortization of customer lists decreased 5.8% from the third quarter of 1995 to
the third quarter of 1996, as propane customer list amortization, which amounted
to $0.3 million in the third quarter of 1995, was excluded from Petro's 1996
financials as a result of the Star MLP.
Depreciation of Plant and Equipment: Home heating oil depreciation of plant and
equipment increased to $1.7 million for the three months ended September 30,
1996, as compared to $1.5 million for the three months ended September 30, 1995
as a result of the Company's recent acquisitions, which outpaced the impact of
certain assets becoming fully depreciated. Total depreciation of plant and
equipment decreased 49.3% from the third quarter of 1995 to the third quarter of
1996, as propane-related depreciation, which amounted to $1.8 million in the
third quarter of 1995, was excluded from Petro's 1996 financials as a result of
the Star MLP.
Amortization of Deferred Charges: Home heating oil amortization of deferred
charges decreased 20.4% to $1.0 million for the three months ended September 30,
1996 as compared to $1.2 million for the three months ended September 30, 1995
as a result of certain deferred items becoming fully amortized at the start of
the third quarter 1996. Total deferred charges decreased 39.4% from the third
quarter of 1995 to the third quarter of 1996 as propane related deferred charge
amortization, which amounted to $0.4 million in the third quarter of 1995, was
not included in Petro's 1996 financials as a result of the Star MLP.
Provision for Supplemental Benefits: Provision for supplemental benefits
declined to $0.2 million for the three months ended September 30, 1996, as
compared to $0.4 million for the three months ended September 30, 1995. This
decrease in supplemental benefits reflect the extension of the exercise date of
certain options previously issued, and the change in provision is due to a
reduction of the accrual required under the vesting schedule of those options.
Operating Loss: Home heating oil operating loss increased 14.3% to $31.0 million
for the three months ended September 30, 1996, as compared to $27.1 million for
the three months ended September 30, 1995. This increase was due to the sudden
increase in product costs, expenses associated with the Company's corporate
identity program, and an increase in non-cash expenses. Total operating income
was virtually unchanged as the impact of propane operating loss, which amounted
to $3.6 million in the third quarter of 1995, was not included in Petro's 1996
financials.
Net Interest Expense: Net interest expense declined 20.0% to $7.8 million for
the three months ended September 30, 1996, as compared to $9.7 million for the
three months ended September 30,1995. This decline was primarily due to a
reduction in average debt outstanding over the two periods of $63.1 million
resulting largely from the application of proceeds from the Star MLP to debt
repayment.
Equity in Loss of Star Gas Partnership: Equity in loss of Star Gas Partnership
was $1.9 million for the three months ended September 30, 1996. Star Gas'
results were consolidated with the Company's for the three months ended
September 30, 1995.
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Net Income (Loss): Net loss remained virtually unchanged at $40.6 million,
despite the $1.3 million in corporate identity expense, an approximate $0.8
million reduction in gross profit associated with the rapid rise in wholesale
product costs and higher operating costs associated with higher volumes and an
increased focus on marketing. Offsetting these factors were lower interest
expense and the elimination of Star's operating loss, which amounted to $3.6
million in the third quarter of 1995, and which was greater than the recorded
equity in loss of Star Gas Corporation of $1.9 million in the third quarter of
1996.
EBITDA: Home heating oil EBITDA loss increased 20.8% to $23.5 million for the
three months ended September 30, 1996, as compared to $19.5 million for the
three months ended September 30, 1995. This change was also primarily due to
$1.3 million of corporate identity charges related to the Long Island
regionalization, higher operating costs associated with higher volume and the
decline in gross profit margins. Total EBITDA loss increased 14.2% to a loss of
$23.5 million for the three months ended September 30, 1996 compared to $20.6
million for the three months ended September 30, 1995, as Star Gas' third
quarter 1995 EBITDA loss of $1.1 million was excluded from Petro's 1996
financials as a result of the Star MLP.
NIDA: While home heating oil EBITDA decreased 20.8%, NIDA improved 1.6% to a
loss of $30.4 million for the three months ended September 30, 1996, as compared
to a loss of $30.9 million for the three months ended September 30, 1996. This
improvement was due to a $1.9 million decrease in net interest expense, the
receipt of $1.4 million in distribution from Star Gas, and the exclusion of $3.6
million of Star Gas NIDA loss in the third quarter of 1995 due to the Star MLP.
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Liquidity and Financial Condition
In December 1995, the Company received net proceeds from the transfer of its
propane assets to the Star Gas Partnership of $134.7 million, $83.7 million from
Star Gas Corporation's First Mortgage Notes and $51.0 million from the Star Gas
MLP equity offering. Approximately $30.0 million of these funds were used in
1995, $24.0 million to repay long-term debt and $6.0 million reserved to
guarantee the Star Gas Partnership's minimum quarterly distribution. In February
1996, $48.6 million of these funds were used to retire $43.8 million of the
Company's $125.0 million 12 1/4% Subordinated Debentures due 2005 at an eleven
percent premium. Overall, the transaction had the effect of enabling Petro to
recoup virtually its entire investment in Star Gas, while allowing Petro to
retain operational control as general partner and a continuing equity ownership
interest of 46.5%. Furthermore, the net proceeds of $134.7 million allowed Petro
to reduce its outstanding debt by approximately $70.0 million by the first
quarter of 1996, and provided the Company with a significant amount of
additional working capital to fund future expansion.
For 1996, net cash provided by operating activities of $28.8 million, combined
with the opening cash balance at January 1, 1996 of $78.3 million, and the
receipt of Star Gas's minimum quarterly distribution of $2.9 million, amounted
to $110.0 million. These funds were utilized in investing activities for
acquisitions and purchase of fixed assets of $25.7 million (which includes $2.0
million of capital expenditures associated with the Long Island regional
customer service center discussed in footnote 5 of the notes to the condensed
consolidated financial statements); and in financing activities to pay dividends
of $13.9 million, redeem preferred stock of $4.2 million, repay notes payable of
$2.1 million, and repurchase subordinated notes of $48.6 million (as described
in the preceding paragraph). These financing activities were partially offset by
cash provided by other financing activities of $5.6 million (which includes $1.4
million of dividend reinvestment proceeds and the release of $3.0 million from
the Star Gas minimum quarterly distribution guarantee based upon the fulfillment
of the guarantee provisions). In addition, the sale of the Company's Springfield
Massachusetts operations generated $4.1 million of proceeds. As a result of the
above activities, the Company's cash balance decreased by $53.1 million to $25.2
million at September 30, 1996.
The Company currently has available a $60.0 million working capital revolving
credit facility. At September 30, 1996, there were no working capital revolving
credit facility borrowings, and the Company had $25.2 million of working
capital.
For the remainder of 1996, the Company anticipates paying dividends on its
Common Stock before dividend reinvestment of approximately $3.8 million. Based
upon the Company's current cash and working capital position and bank credit
facility, the Company expects to be able to meet all of its current obligations
as they become due.
Star Gas Strategic Alternatives
On August 1, 1996 Star Gas Partners, L.P. ("Star Gas") announced that it had
retained an investment banking firm to assist it in the development and
consideration of strategic alternatives designed to maximize the value of Star
Gas to its unitholders, including Petro which owns a 46.5% equity interest. The
alternatives that were to be investigated included, but were not limited to, the
sale or merger of Star Gas. Star Gas has received indications of interest from a
variety of potential acquirers and merger partners, which it is currently
evaluating. Star Gas expects to conclude this evaluation of alternatives some
time during the fourth quarter of 1996 or the first quarter of 1997.
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PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits Included Within:
(27) Financial Data Schedule
10.54 Fourth Amended and Restated Credit Agreement, dated
September 27, 1996, among Petroleum Heat and Power Co., Inc.
the banks and other financial institutions from time to time
parties hereto and The Chase Manhattan Bank.
(b)Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter for which this report
is filed.
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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:
Signature Title Date
- --------- ----- ----
/s/ Irik P. Sevin President, Chairman of the November 14, 1996
- ----------------- Board, Chief Executive Officer,
Irik P. Sevin and Chief Financial and
Accounting Officer and Director
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