Fitch Raises Star Gas' Sr Unsecured Rating to 'BB-/RR2'; Outlook Stable

CHICAGO-(Business Wire)-September 29, 2009 - Fitch Ratings has affirmed the 'B' Issuer Default Rating (IDR) of Star Gas Partners, L.P. (Star Gas) and raised debt ratings as follows:

— Outstanding 10.25% senior unsecured notes due 2013, co-issued with its special purpose financing subsidiary Star Gas Finance Company (the notes), to 'BB-/RR2' from 'B+/RR3'.

The Rating Outlook is Stable. Approximately $133 million of notes remain outstanding.

The decisions to affirm Star Gas' IDR and maintain its Stable Outlook take into account the improvement in the company's overall performance, lower debt balances, the ability of the company to complete a refinancing of its Petroleum Heat and Power Company (Petro) subsidiary revolver in a difficult market environment. After a period of extreme volatility, current spot prices approaching the 2009/2010 heating season have been in a relatively narrow range with heating oil at approximately $1.70 per gallon. While higher heating oil prices create substantially greater working capital needs, the company has a strong liquidity position which should allow it to operate through temporary stress conditions even should heating oil prices spike to previous record levels of $4 to $5 per gallon. These positives are partially offset by the known volatility in heating oil prices, the overall decline in the market for heating oil distribution, continued customer attrition, and conservation and conversions. The company has recently reestablished distributions to unit holders and authorized the repurchase of up to 7.5 million units which will limit cash retention going forward.

The rating for the notes reflects its subordinated position to the secured Petro credit facility. Fitch's Recovery Rating for the outstanding notes, a relative indicator of creditor recovery on a given obligation in the event of a default, was changed to 'RR2' from 'RR3', signifying that higher recovery potential is present. This change was the sole result of the reduction in the amount of notes outstanding. 'RR2' indicates an estimated recovery level of between 70% and 90% in event of a default. According to Fitch's methodology, debt instruments with an 'RR2' recovery rating are placed two notches above the IDR; the change in the recovery rating leads to a one notch upgrade to 'BB-' from 'B+'.

The company should have ample liquidity going into the 2009-2010 heating season. Fitch estimates Star Gas will begin the heating season with no borrowings on its recently renewed Petro facility and over $180 million in cash. In Fitch's rating analysis, Star Gas' robust cash position was a key rating driver. Over the past several years, EBITDA and cash generation have varied due to numerous factors including weather, heating oil prices, attrition, conservation among other factors. The company's strong liquidity position helps to mitigate the risk for creditors and ensure that Star Gas has ample ability to meet its seasonal working capital needs and work its way through difficult operating environments.

As a means of determining whether Star Gas has sufficient liquidity to manage through a further increase in commodity prices, Fitch performed a 24 month sensitivity which projected working capital needs assuming no additional margin growth, no improvement in attrition, no acquisitions and weather that was 7.5% warmer than normal. Under this scenario, Star Gas would have sufficient liquidity to finance working capital needs with heating oil prices of $5 per gallon. However, it is important to note that Petro's credit facility would limit the company's ability to pay distributions or redeem any of its capital stock under this scenario which provides support to creditors during stress conditions. Despite weaker performance, Star Gas manages to retain robust cash balances in a stress scenario.

Fitch projects Star Gas to generate EBITDA of approximately $65 million under normal weather conditions. This level of performance results in debt to EBITDA of approximately 1.8 times (x) and interest coverage of 4.4x. These credit ratios factor in an additional $20 million reduction in outstanding senior notes in 2010. Star Gas was recently authorized by its Board to repurchase up to $20 million in notes in addition to the $36 million repurchased during fiscal 2009.

In its previous credit review, Fitch highlighted refinancing risk associated with the maturity of the Petro revolving credit facility. While the facility was successfully renewed in July 2009, Star Gas' senior notes mature in 2013. Star Gas continues to make periodic repurchases of these notes and Fitch believes that Star Gas has the financial capacity and flexibility to manage the maturity of these notes.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 'www.fitchratings.com'. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.

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