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, 1997
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OR
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 1-9358
PETROLEUM HEAT AND POWER CO., INC.
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(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
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(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, 1997 there were 23,538,243 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, 1997 and December 31, 1996 3
Condensed Consolidated Statements of Operations for the Three Months
Ended September 30, 1997 and September 30, 1996 and the Nine Months
Ended September 30, 1997 and September 30, 1996 4
Condensed Consolidated Statement of Changes in
Stockholders' Equity (Deficiency) for the
Nine Months Ended September 30, 1997 5
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended
September 30, 1997 and September 30, 1996 6
Notes to Condensed Consolidated Financial Statements 7 - 8
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 9 - 16
PART 2 OTHER INFORMATION:
Item 6 - Exhibits and reports on Form 8-K 17
Signature 18
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands)
SEPTEMBER 30, DECEMBER 31,
ASSETS 1997 1996
- ------ ------------- -----------
Current assets:
Cash and cash equivalents $ 13,806 $ 3,257
Restricted cash - 3,000
Accounts receivable (net of allowance of $1,988 and $1,088) 51,981 93,362
Inventories 13,008 22,084
Prepaid expenses 6,355 7,008
Notes receivable and other current assets 1,472 1,299
------- --------
Total current assets 86,622 130,010
------- --------
Property, plant and equipment - net 31,997 30,666
Intangible assets (net of accumulated amortization of $300,374 and $283,486)
Customer lists 73,939 77,778
Deferred charges and pension costs 26,309 25,718
------- --------
100,248 103,496
Investment in and advances to the Star Gas Partnership 23,967 29,907
Deferred gain on Star Gas Transaction (19,964) (19,964)
------- --------
4,003 9,943
------- --------
Other assets 1,048 910
------- --------
$223,918 $275,025
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Working capital borrowings $ - $ 22,000
Current maturities of long-term debt 2,698 3,047
Current maturities of redeemable preferred stock 4,167 4,167
Accounts payable 8,479 18,988
Customer credit balances 26,636 17,468
Unearned service contract revenue 14,645 15,388
Accrued expenses and other liabilities 24,583 30,859
------- --------
Total current liabilities 81,208 111,917
------- --------
Supplemental benefits and other liabilities 1,562 1,584
Pension plan obligation 7,568 7,587
Notes payable and other long-term debt 16,324 16,787
Senior notes payable 63,100 34,150
Subordinated notes payable 209,350 240,400
Redeemable preferred stock 34,167 8,333
Common stock redeemable at option of stockholder (124 Class A
and 31 Class C shares) 984 984
Note receivable from stockholder (984) (984)
Stockholders' equity (deficiency):
Class A common stock-par value $.10 per share; 40,000 shares
authorized, 23,415 and 22,931 shares outstanding 2,343 2,294
Class B common stock-par value $.10 per share; 6,500 shares
authorized, 11 shares outstanding 1 1
Class C common stock-par value $.10 per share; 5,000 shares
authorized, 2,567 shares outstanding 257 257
Additional paid-in capital 79,024 78,804
Deficit (264,921) (221,024)
Minimum pension liability adjustment (6,065) (6,065)
------- --------
Total stockholders' equity (deficiency) (189,361) (145,733)
------- --------
$223,918 $275,025
------- --------
------- --------
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,
---------------------- ----------------------
1997 1996 1997 1996
-------- -------- -------- --------
Net sales $ 50,788 $ 51,060 $386,855 $422,060
Cost of sales 43,206 44,854 271,269 293,064
-------- -------- -------- --------
GROSS PROFIT 7,582 6,206 115,586 128,996
Selling, general and administrative expenses 25,069 24,909 75,103 76,863
Direct delivery expense 3,421 3,503 21,189 23,652
Restructuring charges - - 1,300 1,150
Corporate identity expenses 1,078 1,336 3,188 2,128
Pension curtailment 654 - 654 -
Amortization of customer lists 4,488 4,561 13,419 14,090
Depreciation of plant and equipment 1,801 1,664 5,352 5,053
Amortization of deferred charges 1,165 989 3,469 3,677
Provision for supplemental benefits 141 218 424 655
-------- -------- -------- --------
OPERATING INCOME (LOSS) (30,235) (30,974) (8,512) 1,728
Other income (expense):
Interest expense (8,432) (8,440) (25,581) (26,007)
Interest income 681 647 1,804 1,896
Other 27 (10) 65 1,837
-------- -------- -------- --------
Loss before income taxes, equity
interest and extraordinary item (37,959) (38,777) (32,224) (20,546)
Income taxes (benefit) - (50) 350 350
-------- -------- -------- --------
Loss before equity interest and
extraordinary item (37,959) (38,727) (32,574) (20,896)
Share of loss of Star Gas Partnership (2,357) (1,866) (1,808) (394)
-------- -------- -------- --------
Loss before extraordinary item (40,316) (40,593) (34,382) (21,290)
Extraordinary item-loss on early
extinguishment of debt - - - (6,414)
-------- -------- -------- --------
NET LOSS $(40,316) $(40,593) $(34,382) $ (27,704)
======== ======== ======== =======
Preferred Stock dividends (1,861) (1,195) (3,678) (2,389)
-------- -------- -------- --------
Net loss applicable to common stock $(42,177) $(41,788) $(38,060) $ (30,093)
======== ======== ======== =========
Loss before extraordinary item per common share:
Class A Common Stock $ (1.61) $ (1.63) $ (1.47) $ (.93)
Class B Common Stock - - - -
Class C Common Stock (1.61) (1.63) (1.47) (.93)
Extraordinary (loss) per common share:
Class A Common Stock $ - $ - $ - $ (.25)
Class B Common Stock - - - -
Class C Common Stock - - - (.25)
Net loss per common share:
Class A Common Stock $ (1.61) $ (1.63) $ (1.47) $ (1.18)
Class B Common Stock - - - -
Class C Common Stock (1.61) (1.63) (1.47) (1.18)
Cash dividends declared per common share:
Class A Common Stock $ .075 $ .15 $ .225 $ .45
Class B Common Stock - - - -
Class C Common Stock .075 .15 .225 .45
Weighted average number of common shares outstanding:
Class A Common Stock 23,538 23,021 23,339 22,939
Class B Common Stock 11 12 11 13
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, 1997
(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 ADJ. TOTAL
-------- ------- ------- ------- ------- ------- ---------- ----------- --------- ----------
BALANCE AT
DECEMBER 31, 1996 22,931 $2,294 11 $ 1 2,567 $ 257 $78,804 $(221,024) $(6,065) $(145,733)
NET LOSS (34,382) (34,382)
CASH DIVIDENDS
DECLARED AND PAID (7,554) (7,554)
CASH DIVIDENDS
PAYABLE (1,961) (1,961)
CLASS A COMMON
STOCK ISSUED
UNDER THE
DIVIDEND
REINVESTMENT PLAN 479 48 1,701 1,749
PREFERRED STOCK
OFFERING COSTS (1,678) (1,678)
OTHER 5 1 197 198
-------- ------- ------- ------- ------- ------- ---------- ----------- --------- ---------
BALANCE AT
SEPTEMBER 30, 1997 23,415 $2,343 11 $ 1 2,567 $ 257 $79,024 $(264,921) $(6,065) $(189,361)
======== ======= ======= ======= ======= ======= ========== =========== ========= =========
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
SEPTEMBER 30,
------------------------
(In thousands) 1997 1996
-------- --------
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net loss $(34,382) $(27,704)
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:
Amortization of customer lists 13,419 14,090
Depreciation of plant and equipment 5,352 5,053
Amortization of deferred charges 3,469 3,677
Share of loss of Star Gas 1,808 394
Provision for losses on accounts receivable 1,435 1,295
Provision for supplemental benefits 424 655
Loss on early extinguishment of debt - 6,414
Gain on sale of business - (1,801)
Other (84) (54)
Change in Operating Assets and Liabilities, net of effects of acquisitions and
dispositions:
Decrease in accounts receivable 39,946 36,937
Decrease in inventory 9,076 5,525
Decrease (increase) in other current assets 480 (570)
Increase in other assets (138) (87)
Decrease in accounts payable (10,509) (14,165)
Increase in customer credit balances 9,168 5,114
Decrease in unearned service contract revenue (743) (1,637)
Decrease in accrued expenses (4,379) (4,374)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 34,342 28,762
-------- --------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Minimum quarterly distributions from Star Gas Partnership 4,130 2,936
Acquisitions (13,195) (22,045)
Capital expenditures (5,404) (4,052)
Proceeds from sale of business - 4,073
Net proceeds from sales of fixed assets 410 395
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (14,059) (18,693)
-------- --------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 1,749 1,429
Net proceeds from issuance of preferred stock 28,323 -
Repayment of notes payable (1,050) (1,050)
Redemption of preferred stock (4,167) (4,167)
Repurchase of common stock - (39)
Repurchase of subordinated notes (1,050) (49,612)
Credit facility borrowings 13,000 29,000
Credit facility repayments (35,000) (29,000)
Decrease in restricted cash 3,000 3,000
Cash dividends paid (11,410) (13,859)
Other (3,129) 1,167
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NET CASH USED IN FINANCING ACTIVITIES (9,734) (63,131)
-------- --------
NET INCREASE (DECREASE) IN CASH 10,549 (53,062)
CASH AT BEGINNING OF YEAR 3,257 78,285
-------- --------
CASH AT END OF PERIOD $ 13,806 $ 25,223
-------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 29,363 $ 29,528
Income taxes $ 135 $ 231
See accompanying notes to condensed consolidated financial statements.
- 6 -
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, 1997 are not
necessarily indicative of the results to be expected for the full year.
2. ACCOUNTING CHANGES
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128 - "Earnings Per
Share." SFAS No. 128 requires presentation of "basic" and "diluted" earnings
per share for periods ending after December 15, 1997. The impact of adopting
SFAS No. 128 will be immaterial.
3. PER SHARE DATA
The Company computes net income per common share 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 for preferred
dividends declared aggregating $3.7 million and $2.4 million for the nine
months ended September 30, 1997 and 1996 respectively, and $1.9 million and
$1.2 million for the three months ended September 30, 1997 and 1996
respectively. Diluted net income per common shares are not presented because
the effect is not material.
4. ACQUISITIONS / DISPOSITION
During the nine month period ending September 30, 1997 the Company acquired
the customer lists and equipment of eight unaffiliated fuel oil dealers. The
aggregate consideration for this acquisition, accounted for by the purchase
method, was approximately $12.8 million. Sales and net income of the
acquired companies are included in the condensed consolidated statements of
operations from the respective dates of acquisition.
Had these acquisitions occurred at the beginning of the period, the pro
forma unaudited results of operations for the nine months ended September
30, 1997 would have been as follows:
(IN THOUSANDS, EXCEPT PER SHARE)
Net sales $ 395,858
Net loss (34,004)
Net loss per common share:
Class A Common Stock $ (1.45)
Class B Common Stock -
Class C Common Stock $ (1.45)
- 7 -
PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. ACQUISITIONS / DISPOSITION (CONTINUED)
Star Gas Corporation ("Star Gas"), is a wholly owned subsidiary of the
Company and is the general partner of Star Gas Partners, L.P. ("the
Partnership"). In October 1997, Star Gas purchased all the outstanding
capital stock of Pearl Gas Co. ("Pearl"), an Ohio corporation that markets
and distributes annually approximately 14.3 million gallons of propane in
Ohio and Michigan to over 12,000 customers. The purchase price for all the
outstanding Pearl capital stock was $22.6 million which included $1.9 million
for working capital that will be adjusted to reflect the actual working
capital on the date of the acquisition. Funding for the stock purchase was
provided by a $23.0 million bank acquisition facility.
Immediately after the acquisition of its capital stock, Pearl was merged into
Star Gas in a tax-free liquidation, and Star Gas entered into a Conveyance
and Contribution Agreement ("the Agreement") with the Partnership whereby
Star Gas contributed all the assets obtained in the merger with
Pearl. In return the Partnership assumed all the liabilities associated
with the Pearl stock purchase, including the obligations under the $23.0
million bank acquisition facility, and conveyed to Star Gas a 0.00027%
general partnership interest in the Partnership along with 147,727
Partnership common units. The aggregate value of all interests transferred to
Star Gas was $3.5 million, which included compensation for the additional
income tax liabilities the Company will incur as a result of the transaction.
On November 5, 1997, the Company sold its Hartford Connecticut operation to an
unaffiliated fuel oil dealer. The company received proceeds of approximately
$16.0 million and estimates that a gain ranging between $12.0 million and
$12.5 million will be recognized in the fourth Quarter of 1997.
5. DEFERRED GAIN ON THE 1995 STAR GAS TRANSACTION
In accordance with the Company's accounting policies, the Company deferred
the gain of approximately $20.0 million on the 1995 Star Gas transaction
because the Company received subordinate units which do not readily have an
ascertainable market price creating an uncertainty regarding realization, and
due to the fact that Star Gas as general partner had a $6.0 million
additional capital contribution obligation to enhance the Partnership's
ability to make quarterly distributions on the common units (at September 30,
1997, these funds were no longer restricted at the Star Gas level because
they had been released to Petro since the quarterly guarantee provisions were
fulfilled). The Company will recognize the gain from this transaction when
the Company's subordinated units convert into common units in accordance with
the terms of the partnership agreement. In general, full conversion of
subordinated units to common units will take place no earlier than the first
day of any quarter beginning on or after January 1, 2001, based upon the
satisfaction of certain performance criteria for a period of at least three
non-overlapping consecutive four-quarter periods immediately preceding the
conversion date.
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PETROLEUM HEAT AND POWER CO., INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-------------------------
Overview
In analyzing Petro's results for the nine-month and three-month periods ended
September 30, 1997, 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.
NINE MONTHS ENDED SEPTEMBER 30, 1997
COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1996
VOLUME. Home heating oil volume decreased 12.4% to 282.8 million gallons for
the nine months ended September 30, 1997, as compared to 322.8 million gallons
for the nine months ended September 30, 1996. This decline was largely due to
8.4% warmer weather in the first quarter of 1997, as temperatures were
significantly warmer than normal in contrast to the slightly colder than normal
weather experienced during the first quarter of 1996. In addition, volume was
also negatively impacted by net account attrition. Partially offsetting these
two factors was the acquisition by the Company of twenty one individually
insignificant heating oil companies since the beginning of 1996.
NET SALES. Net sales decreased 8.3% to $386.9 million for the nine months ended
September 30, 1997, as compared to $422.1 million for the nine months ended
September 30, 1996. This decline was due to decreased volume, partially offset
by slightly higher selling prices.
GROSS PROFIT. Gross profit decreased 10.4% to $115.6 million for the nine
months ended September 30, 1997, as compared to $129.0 million for the nine
months ended September 30, 1996. Gross profit did not decline to the same
extent as volume due to an increase of 1.4 cents per gallon in home heating oil
margins in the first nine months of 1997 as compared to the first nine months of
1996. This was largely due an improvement in customer pricing.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased 2.3% to $75.1 million for the nine months
ended September 30, 1997, as compared to $76.9 million for the nine months ended
September 30, 1996. This decline was despite inflationary pressures in expenses
and was due both to reductions in certain expenses resulting from the Company's
operational efficiency programs and to the Company's ability to reduce certain
overhead costs in response to a decline in volume.
DIRECT DELIVERY EXPENSES. Direct delivery expenses decreased 10.4% to $21.2
million for the nine months ended September 30, 1997, as compared to $23.7
million for the nine months ended September 30, 1996, reflecting both the
reduction in volume and the presence in the first quarter of 1996 of severe
winter storms which increased the Company's delivery expenses.
RESTRUCTURING CHARGES. Restructuring charges remained relatively unchanged at
$1.3 million for the nine months ended September 30, 1997, as compared to $1.1
million for the nine months ended September 30, 1996. These charges represent
costs associated with the Company's regionalization and consolidation program in
the New York/Long Island region.
- 9 -
CORPORATE IDENTITY EXPENSES. Corporate identity expenses for the nine months
ended September 30, 1997 were $3.2 million, as compared to $2.1 million for the
nine months ended September 30, 1996. These expenses represent costs associated
with the Company's brand identity program, implemented in Long Island during
1996 and in the Company's New York and Mid Atlantic regions during 1997, and
include the cost of repainting all delivery and service vehicles to reflect the
company's new identity. Through this program the Company intends to capitalize
on its size by building significant brand equity in one "Petro" brand name,
rather than the multiple names previously in use.
PENSION CURTAILMENT . Pension curtailment expenses for the nine months ended
September 30, 1997 were $0.7 million and represent the costs associated with
freezing the benefits under the Company's union-defined benefit pension plan
resulting from the 1997 consolidation of the New York City operations.
AMORTIZATION OF CUSTOMER LISTS. Amortization of customer lists decreased 4.8%
to $13.4 million for the nine months ended September 30, 1997, as compared to
$14.1 million for the nine months ended September 30, 1996, as the impact of
certain customer lists becoming fully amortized exceeded the impact of the
amortization associated with the Company's recent acquisitions.
DEPRECIATION OF PLANT AND EQUIPMENT. Depreciation and amortization of plant and
equipment increased 5.9% to $5.4 million for the nine months ended September 30,
1997, as compared to $5.1 million for the nine months ended September 30, 1996,
as a result of certain investments made related to our operational efficiency
programs in the New York and Mid Atlantic regions.
AMORTIZATION OF DEFERRED CHARGES. Amortization of deferred charges decreased
5.7% to $3.5 million for the nine months ended September 30, 1997, as compared
to $3.7 million for the nine months ended September 30, 1996, as the impact of
certain deferred charges becoming fully amortized exceeded the impact of the
depreciation associated with the Company's recent acquisitions.
PROVISION FOR SUPPLEMENTAL BENEFITS. Provision for supplemental benefits
declined to $0.4 million for the nine months ended September 30, 1997, as
compared to $0.7 million for the nine months ended September 30, 1996. These
supplemental benefits reflect the extension of the exercise date of certain
options previously issued and a change in the provision due to a reduction of
the accrual required under the vesting schedule of those options.
OPERATING INCOME. Operating income decreased to an operating loss of $8.5
million for the nine months ended September 30, 1997, as compared to operating
income of $1.7 million for the nine months ended September 30, 1996. This
decline was largely a result of the weather-related decline in volume and an
increase in restructuring and corporate identity expenses, partially offset by
the Company's ability to reduce certain operating expenses in response to the
warm weather and an increase in the Company's heating oil margins.
NET INTEREST EXPENSE. Net interest expense remained relatively unchanged at
$23.8 million for the nine months ended September 30, 1997, as compared to $24.1
million for the nine months ended September 30, 1996. This resulted from a
small reduction in gross interest expense resulting from both a slight decline
in average borrowings outstanding and average rate, and was partially offset by
a $0.1 million decline in interest income.
OTHER INCOME. Other income for the nine months ended September 30, 1996 was
$1.8 million, reflecting the sale in the second quarter of 1996 of the Company's
sub-performing Springfield, Massachusetts heating oil operations.
- 10 -
EQUITY IN LOSS OF STAR GAS PARTNERSHIP. Equity in the loss of Star Gas
Partnership increased to $1.8 million for the nine months ended September 30,
1997, as compared to $0.4 million for the nine months ended September 30, 1996.
This increase was due to the impact of warm weather on Star Gas' propane volume
and net income.
EXTRAORDINARY ITEM. The extraordinary charge in February of 1996 of $6.4
million resulted from the retirement of $43.8 million of 12.25% Subordinated
Debentures due 2005. This charge included 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 LOSS. Net loss increased 24.1% to a loss of $34.4 million for the nine
months ended September 30, 1997, as compared to a loss of $27.7 million for the
nine months ended September 30, 1996. This increase was largely due to the
impact of warm first quarter weather on both the Company's and Star's volume, an
increase in restructuring and corporate identity expenses, and the gain
recognized on the sale of the Company's Springfield, Massachusetts business
during the prior year, partially offset by improved heating oil margins and the
absence in 1997 of the extraordinary item described above.
EBITDA*. EBITDA decreased 43.8% to $14.2 million for the nine months ended
September 30, 1997, as compared to $25.2 million for the nine months ended
September 30, 1996. This decline was due to decreased volume resulting from the
warm first quarter 1997 weather and to an increase in restructuring and
corporate identity costs, partially offset by improved heating oil margins.
Excluding restructuring and corporate identity expenses related to the Company's
operational programs, and taking into account distributions actually received
from Star Gas, EBITDA declined to $22.8 million from $31.4 million.
NIDA**. NIDA declined to an $8.8 million loss for the nine months ended
September 30, 1997, as compared to $3.8 million for the nine months ended
September 30, 1996. This decline was primarily the result of the reduction in
EBITDA caused by warm weather and increases in restructuring and corporate
identity expenses (described above). Excluding restructuring and corporate
identity expenses, NIDA declined to a loss of $4.3 million from $7.1 million.
* EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) is
defined as operating income before 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. EBITDA is a non-GAAP measure that may not be
comparable to measures of the same title reported by other companies and 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
availability to service debt obligations), but provides additional significant
information in that EBITDA is a principal basis upon which the Company assesses
its financial performance.
** NIDA (Net Income (Loss) Before Extraordinary Item, Depreciation and
Amortization)is defined as net income (loss) before extraordinary item, 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, plus any cash dividends received
by the Company from these investments. NIDA is a non-GAAP measure that may not
be comparable to measures of the same title reported by other companies and
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 in that NIDA is a principal basis upon which the Company assesses
its financial performance.
- 11 -
THREE MONTHS ENDING SEPTEMBER 30, 1997
COMPARED TO THREE MONTHS ENDING SEPTEMBER 30, 1996
VOLUME. Home heating oil volume remained relatively unchanged at 28.5 million
gallons for the three months ended September 30, 1997, as compared to 28.6
million gallons for the three months ended September 30, 1996.
NET SALES. Net sales also remained relatively unchanged at $50.8 million for
the three months ended September 30, 1997, as compared to $51.1 million for the
three months ended September 30, 1996.
GROSS PROFIT. Gross profit increased 22.2% to $7.6 million for the three months
ended September 30, 1997, as compared to $6.2 million for the three months ended
September 30, 1996. This improvement in gross profit resulted from a 4.0 cent
increase in home heating oil gross profit margins over the prior year period,
due to reduced cost of product for the quarter as well as a 5.0% reduction in
net service and installation costs, which are included in the calculation of the
Company's gross profit, and which are a direct result of the Company's
operational efficiency programs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general, and
administrative expenses remained relatively unchanged at $25.1 million for the
three months ended September 30, 1997, as compared to $24.9 million for the
three months ended September 30, 1996, as the impact of the Company's
productivity programs offset wage-related inflationary pressures.
DIRECT DELIVERY EXPENSE. Direct delivery expenses decreased 2.3% to $3.4
million for the three months ended September 30, 1997, as compared to $3.5 for
the three months ended September 30, 1996. This decline in expenses was a
result of the Company's productivity programs, which more than offset the impact
of inflation.
CORPORATE IDENTITY EXPENSES. Corporate identity expenses were $1.1 million for
the three months ended September 30, 1997, as compared to $1.3 million for the
three months ended September 30, 1996. These expenses represent costs
associated with the Company's brand identity program in the New York and Mid
Atlantic regions, as described in the nine month discussion.
PENSION CURTAILMENT . Pension curtailment expenses were $0.7 million for the
three months ended September 30, 1997 and represent the costs associated with
freezing the benefits under the Company's union-defined benefit pension plan
resulting from the 1997 consolidation of the New York City operations.
AMORTIZATION OF CUSTOMER LISTS. Amortization of customer lists remained
relatively unchanged at $4.5 million for the three months ended September 30,
1997, as compared to $4.6 million for the three months ended September 30, 1996,
as the impact of certain customer lists becoming fully amortized only slightly
exceeded the effect of the Company's recent acquisitions.
DEPRECIATION AND AMORTIZATION OF PLANT AND EQUIPMENT. Depreciation and
amortization of plant and equipment remained relatively unchanged at $1.8
million for the three months ended September 30, 1997, as compared to $1.7
million for the three months ended September 30, 1996.
AMORTIZATION OF DEFERRED CHARGES. Amortization of deferred charges increased
17.8% to $1.2 million for the three months ended September 30, 1997, as compared
to $1.0 million for the three months ended September 30, 1996, as the impact of
the Company's recent acquisitions exceeded the effect of certain deferred
charges becoming fully amortized.
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PROVISION FOR SUPPLEMENTAL BENEFITS. Provision for supplemental benefits
declined to $0.1 million for the three months ended September 30, 1997, as
compared to $0.2 million for the three months ended September 30, 1996. 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 LOSS: Operating loss improved 2.4% to $30.2 million for the three
months ended September 30, 1997, as compared to $31.0 million for the three
months ended September 30, 1996. This was largely due to the Company's
significant improvement in home heating oil gross profit margins over the prior
year period, partially offset by pension curtailment expenses which the Company
did not incur in the prior year period and by the increase in the amortization
of deferred charges.
NET INTEREST EXPENSE: Net interest expense remained relatively unchanged at
$7.8 million for the three months ended September 30, 1997.
EQUITY IN LOSS OF STAR GAS PARTNERSHIP: Equity in the loss of Star Gas
Partnership increased to $2.4 million for the three months ended September 30,
1997, as compared to $1.9 million for the three months ended September 30, 1996.
This increase was due to the impact of higher non-cash expenses and lower
wholesale margins on Star Gas' net income.
NET LOSS: Net loss improved to $40.3 million for the three months ended
September 30, 1997, as compared to $40.6 million for the three months ended
September 30, 1996. This was primarily due to the Company's significant
improvement in home heating oil gross profit margins over the prior year period,
partially offset by pension curtailment expenses which the Company did not incur
in the prior year period and an increase in non-cash expenses.
EBITDA: EBITDA loss improved 3.8% to $22.6 million for the three months ended
September 30, 1997, as compared to $23.5 million for the three months ended
September 30, 1996. This was primarily due to the Company's significant
improvement in home heating oil gross profit margins over the prior year period,
partially offset by pension curtailment expenses which the Company did not incur
in the prior year period. Excluding the operational restructuring-related
corporate identity and pension curtailment costs, EBITDA loss improved 5.9% to
$20.9 million from $22.2 million.
NIDA: NIDA improved 2.5% to a loss of $29.6 million for the three months ended
September 30, 1997, as compared to a loss of $30.4 million for the three months
ended September 30, 1996. This improvement was largely due to the Company's
significant improvement in home heating oil gross profit margins over the prior
year period, partially offset by an increase in preferred dividends over the
1996 period.
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LIQUIDITY AND FINANCIAL CONDITION
In February 1997 the Company entered into agreements ("Private Debt
Modifications") to among other things, exchange the remaining $30.0 million
of its $60.0 million 11.85%, 12.17%, and 12.18% notes ("11.96% Notes") ranked
as subordinated debt to senior debt, and to extend the maturity date of the
$60.0 million 11.96% Notes from October 1, 1998 to October 1, 2002 with $15.0
million sinking fund payments due on October 1, 2000 and October 1, 2001 and
the remaining $30.0 million balance due on October 1, 2002.
Also in February 1997 the Company issued $30.0 million of 12 7/8%
Exchangeable Preferred Stock due February 15, 2009. The intended use of this
offering's net proceeds of $28.3 million is for general corporate purposes,
as well as funding the Company's operational restructuring and acquisition
programs.
Net cash provided by operating activities of $34.3 million combined with the
$28.3 million net proceeds from the 12 7/8% Exchangeable Preferred Stock
offering described in the previous paragraph, amounted to $62.6 million.
These funds were utilized in investing activities for acquisitions and the
purchase of fixed assets of $18.5 million; and in financing activities to
repay notes payable of $1.1 million, repurchase subordinated notes of $1.1
million, repay net credit facility borrowings of $22.0 million, redeem
preferred stock of $4.2 million, pay cash dividends of $11.4 million, and
other financing activities of $3.1 million, which includes $1.2 million
associated with the Private Debt Modification of the 11.96% Notes. These
financing activities were partially offset by cash provided from the Star Gas
minimum quarterly distribution of $4.1 million, the release of $3.0 million
in restricted cash as all quarterly guarantee provisions were fulfilled, the
proceeds from the sale of fixed assets of $0.4 million, and proceeds from
dividend reinvestments of $1.8 million. As a result of the above activities,
the Company's cash balance increased by $10.5 million.
The Company currently has available a $47.0 million working capital revolving
credit facility. No amount was outstanding under this credit facility at
September 30, 1997, and the Company had $5.4 million of working capital.
Prior to October 1997, the Company had a $60.0 million working capital
revolving credit facility, but in tandem with its agreement to sell its
branch in Hartford, Connecticut for approximately $16.0 million, the working
capital revolving credit facility was reduced to $47.0 million. $9.4 million
of the proceeds from this sale were set aside to collateralize a portion of
the outstanding acquisition letter of credit. Cash collateral requirements
had originally been scheduled to begin in June 1998.
For the remainder of 1997, the Company anticipates paying dividends on its
Common Stock before dividend reinvestment of approximately $2.0 million, and
paying $1.0 million in preferred stock dividends.
In addition, as a result of the December 1995 Star Gas Transaction, Star Gas
Corporation, a wholly-owned subsidiary of the Company, as general partner
remains contingently liable for the Partnership's obligations. These
contingent liabilities are limited to Star Gas Corporation. Furthermore, to
enhance the Partnership's ability to pay a minimum quarterly distribution on
its common units, Star Gas agreed, subject to certain limitations, to
contribute up to $6.0 million in additional capital to the Partnership if,
and to the extent that, the amount of available cash constituting operating
surplus with respect to any quarter is less than the amount necessary to
distribute the minimum quarterly distribution on all outstanding common units
for such quarter. At September 30, 1997 none of these funds were restricted
at the Star Gas level, as they were released to Petro since the quarterly
guarantee provisions were satisfied.
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Based on the Company's current cash and working capital position, and bank
credit facility, the Company expects to be able to meet all of the above
mentioned obligations, as well as meet all of its other current obligations
as they become due.
RESTRUCTURING CHARGES
Over the past two years Petro has dedicated a large amount of effort toward
defining the best possible organizational structure for the Company. The
objective has been to structure the Company to provide superior service to
its customers, build a brand image, and reduce operating costs.
As part of the initial implementation of this 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 consolidated accounting, credit, customer
service and the sales function into a single new facility in Port Washington,
Long Island. All external communications and marketing previously undertaken
in the five branches were 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. The Company incurred $1.2 million in restructuring expenses in
the second quarter of 1996, for costs associated with the initial
implementation of the restructuring program.
In April 1997, the Company informed its New York City employees of the
intentions to continue the restructuring activity. Such activity included
combining the Company's three New York City branches into one new central
depot that specialized in delivery, installation, maintenance, and service
functions, and like the Long Island depots, be supported by the Port
Washington facility. The Company recorded a restructuring charge of $1.3
million in the second quarter of 1997 for restructuring costs of $0.4 million
for termination benefit arrangements with employees and $0.9 million for
continuing lease obligations for unused non-cancelable non-strategic
facilities.
To reflect the Company's continued commitment to define the best possible
organizational structure, in November 1997, the Company announced its
intentions to continue its restructuring activity at both the branch and
corporate level. Toward achieving its strategic intentions to define the best
possible organizational structure for both the corporate and regional
locations, and to execute its plan to eliminate redundancy and locate
responsibilities where they can best serve the Company, approximately $0.75
million in restructuring charges will be recorded by the Company during the
fourth quarter of 1997, for restructuring costs resulting from termination
benefit arrangements with certain branch and corporate employees.
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CORPORATE IDENTITY EXPENSES
Concurrently with the Company's initial restructuring efforts to increase
productivity and customer responsiveness, the Company implemented a corporate
identity program to increase the brand awareness of the "Petro" name among
heating oil customers. The implementation of this program began in April 1996
with its Long Island region, where the new "Petro" identity and image was
established while the region was being restructured. Under this program, the
Company began servicing its approximate 100,000 Long Island customers using
the "Petro" brand name, rather than the twelve previously in use. At December
31, 1996, the Company expended $2.7 million for corporate identity expenses,
which represented costs associated with repainting the fleet, issuing new
uniforms and advertising the new "Petro" brand name.
For the Nine months ended September 30, 1997 the Company incurred $3.2
million in corporate identity expenses for costs associated with implementing
its corporate identity program throughout the metropolitan New York City area
and its Mid-Atlantic region. The Company anticipates additional corporate
identity expenses for the fourth Quarter of 1997 to approximate $0.8 million.
STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE
This report includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act which
represent the Company's expectations or beliefs concerning future events that
involve risks and uncertainties, including those associated with the effect
of weather conditions on the company's financial performance, the price and
supply of home heating oil, the ability of the Company to obtain new accounts
and retain existing accounts and the ability of the Company to realize cost
reductions from its operational restructuring program. All statements other
than statements of historical facts included in this Report including,
without limitation, the statements under "Management's Discussion and
Analysis of Results of Operations and Financial Condition" and elsewhere
herein, are forward-looking statements. Although the Company believes that
the expectations reflected in such forward-looking statements are reasonable,
it can give no assurance that such expectations will prove to have been
correct.
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PART II OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS INCLUDED WITHIN:
(10.26) Consent Number 2 and Second Amendment dated as of October 15,
1997 to the Fourth Amended and Restated Credit Agreement,
dated as of September 27, 1996, among Petroleum Heat and
Power Co., Inc., the several banks and financial
institutions from time to time parties thereto and
The Chase Manhattan Bank, as agent for such Banks.
(10.27) Lease Agreement by and between Capital Distributors Corp. a
New York Corporation and Petroleum Heat and Power Co., Inc.
dated as of February 7, 1997 for 55-60 58th Street, Maspeth,
New York 11378.
(27) Financial Data Schedule
(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 Chairman of the Board, Chief November 10, 1997
- ----------------- Executive Officer, and
Irik P. Sevin Chief Financial and Accounting
Officer and Director
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