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Owner of Long Island, N.Y., Home Heating-Oil Suppliers May Get Big Boost

Posted on: Wednesday, 7 December 2005, 12:00 CST

By James Bernstein, Newsday, Melville, N.Y.

Dec. 6--Star Gas Partners, owner of the largest suppliers of home heating oil on Long Island, yesterday announced a deal that could bring in at least $87 million in new financing, a year after the company said it was on the verge of bankruptcy.

The company, owner of Petro and Meenan oil units, said that its board of directors had approved a deal in which Kestrel Energy Partners, a private investment firm, will provide a total of $50 million in cash -- $15 million in new capital and the remainder a $35-million "standby commitment" to buy any of the $35 million not purchased by investors at $2 a share.

Based in Stamford, Conn., Star Gas said that it will invest $10 million of its own money, and that some of its noteholders have agreed to convert approximately $27 million of their notes to stock. Star Gas said that it will use the money it raises to begin paying down debt of $265 million due in 2013.

The deal must be approved by Star Gas shareholders, the company said.

Yesterday, shareholders were warmed by the announcement, sending the company's stock up 56.82 percent, or 75 cents, to close at $2.07, in heavy trading. The stock was at a high this year of $7.22.

Joseph Cavanaugh, who in March took over as chief executive of the financially struggling company from a mother-and-son team, declined in a telephone interview yesterday to say whether the deal averts a bankruptcy filing, which Star Gas warned of in October 2004.

"What it does mean, once this is approved ... is that we're in a very sound financial position," Cavanaugh said. "We are very liquid."

One analyst who follows the company but asked to remain anonymous said that the deal "greatly enhances the survivability of the company. This is a step to ensure they will have excess capital that will allow them to operate in whatever winter conditions come about."

Star Gas is one of the country's largest distributors of home-heating oil. The company has about 480,000 customers nationwide, including approximately 120,000 on Long Island.

Star Gas got into trouble last year when its Petro division decided to honor commitments and not raise prices, even as the cost of home-heating oil soared.

Kevin Rooney, executive director of the Oil Heat Institute of Long Island, said he was heartened by word of the deal, but added that Star Gas must still work to turn around a decline in its customer base.

"There are still problems," Rooney said. "But the prognosis longer term looks positive and healthy."

Fitch Ratings yesterday placed Star Gas on a "Rating Watch Evolving," a step up from its previous rating of CCC and a "negative outlook." A triple C rating indicates there is a reasonable probability a company could default. Lower ratings make it more difficult for a company to borrow money. Ralph Pellecchia, a Fitch spokesman, said the rating was changed because of the announcement.

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SGU,

Source: Newsday, Melville, N.Y.

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