Star Gas Partners, L.P. — Form 10-Q Summary
Business Context and Reporting Period
Star Gas Partners, L.P. is a master limited partnership providing home heating oil, propane, fuel products, installations, repair and maintenance services, home security and plumbing services. As of March 31, 2017, it served approximately 441,000 full-service residential and commercial heating customers, 74,000 delivery-only customers, 14,400 service-contract customers and 28,500 home security and plumbing customers.
The filing covers the three and six months ended March 31, 2017, the second quarter and first six months of fiscal 2017. Results are highly seasonal, with the second fiscal quarter generally representing the peak heating season. The filing text identifies the registrant as Star Gas Partners, L.P.
Financial Metrics
| Metric | Three Months Ended March 31 | Six Months Ended March 31 |
|---|---|---|
| Total sales | $532.1 million, up 15.2% | $916.2 million, up 17.3% |
| Operating income | $69.0 million, down 28.3% | $102.3 million, down 14.8% |
| Net income | $39.7 million, down 28.1% | $58.0 million, down 13.8% |
| Income per limited partner unit | $0.59, versus $0.79 | $0.87, versus $0.98 |
| Adjusted EBITDA | $88.2 million, down 0.6% | $119.4 million, down 4.2% |
| Net margin | 7.5%, versus 12.0% | 6.3%, versus 8.6% |
Product sales increased primarily because wholesale product costs rose 34.0% in the quarter and 24.3% for the six-month period, despite lower quarterly heating-oil and propane volume. Six-month heating-oil and propane volume increased 7.0% because the prior-year comparable period was substantially warmer.
Heating-oil and propane margin improved to $1.1613 per gallon in the quarter from $1.1242, but declined to $1.1344 per gallon for the six months from $1.1436. Service and installation activities produced a combined gross loss of $1.9 million in the quarter and $0.6 million for the six months.
Cash Flow, Liquidity and Capitalization
- Cash used in operating activities was $35.9 million for the six months, compared with $74.2 million of cash provided in the prior-year period. The primary pressure was a $111.6 million increase in receivables, together with lower customer credit balances.
- Investing cash outflow was $26.8 million, including $7.8 million of capital expenditures, $7.7 million of acquisition cash payments and $11.5 million deposited into an irrevocable insurance trust.
- Financing cash outflow was $23.4 million, including $11.2 million of term-loan repayment and $11.7 million of distributions.
- Cash, cash equivalents and restricted cash declined to $53.1 million at March 31, 2017, from $139.2 million at September 30, 2016; cash and cash equivalents were $52.9 million.
- Total debt was $80.6 million carrying value, consisting of an $80.6 million senior secured term loan. There were no revolving-credit borrowings. The term loan effective interest rate was approximately 3.92%.
- Credit-facility availability was $235.6 million, with $48.4 million of letters of credit outstanding and $3.3 million of hedge positions secured under the facility. The Partnership was in compliance with applicable financial covenants.
- Management estimated approximately $4.4 million of maintenance capital expenditures and an additional $1.1 million investment in propane operations for the remainder of fiscal 2017.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue increased 15.2%, but operating income and net income declined substantially because of a $12.4 million derivative fair-value charge, higher delivery and branch expenses, and weaker service and installation results.
- Six-month revenue increased 17.3%, while net income declined 13.8%. The comparison was adversely affected by the absence of a $12.5 million weather-hedge benefit recorded in the first quarter of fiscal 2016.
- Six-month Adjusted EBITDA declined 4.2% to $119.4 million despite higher heating-oil and propane volume.
- Net customer gains were approximately 2,000, or 0.5% of the heating-oil and propane customer base, compared with net attrition of approximately 7,000 customers, or 1.5%, in the prior-year period.
- The Partnership completed four acquisitions for an aggregate purchase price of approximately $9.2 million, compared with two acquisitions costing approximately $7.6 million in the prior-year period.
- Term-loan debt decreased by approximately $11.1 million from September 30, 2016, and by $16.2 million year over year.
Guidance, Outlook, Risks and Unusual Items
Management did not provide formal full-year earnings guidance in the filing. It stated that current quarterly distributions of $0.11 per unit would result in approximately $12.3 million of additional common-unit distributions for the balance of fiscal 2017, plus amounts payable to the general partner and management.
- Weather remains a major risk. Fiscal 2017 heating conditions were colder than the prior-year period for the six months but remained warmer than normal. No weather-hedge benefit was recorded for the six months ended March 31, 2017.
- Derivative instruments are not designated as accounting hedges; changes in their fair value flow through earnings and can create significant non-cash volatility. The quarter included a $12.4 million charge and the six-month period included a $3.9 million charge.
- Wholesale fuel-price volatility can increase working-capital requirements, hedge collateral requirements and customer credit exposure. A hypothetical 100-basis-point increase in variable interest rates would reduce annual after-tax cash flow by approximately $0.5 million.
- Natural-gas conversions, customer attrition, fuel conservation, pricing pressure, customer creditworthiness, counterparty creditworthiness, labor relations, regulation and acquisition execution may affect future results.
- A new putative class action was filed in April 2017 concerning protected-price-plan benefits. The Partnership believes the claims lack merit, but stated that it cannot assess the potential outcome or materiality.
- Undiscounted future minimum operating-lease payments through 2032 were approximately $118.9 million. The future lease standard is expected to materially change the balance sheet when adopted, although the discounted amounts were not yet determinable.
- In April 2017, the Partnership declared a $0.11 per-unit quarterly distribution payable May 8, 2017.
Key Facts for Investors to Verify
- Whether seasonal cash generation during the spring and summer sufficiently rebuilds liquidity after the $35.9 million first-half operating cash outflow.
- The sustainability of the $1.1344 per-gallon six-month heating-oil and propane margin and the effect of future fuel-price changes.
- The timing and amount of required term-loan repayments, including any excess-cash-flow payment.
- The impact of derivative fair-value movements and the absence or availability of future weather-hedge recoveries.
- Customer retention trends, natural-gas conversions and the profitability of service and installation operations.
- The potential financial and operational consequences of the putative protected-price-plan class action.
- The eventual balance-sheet impact of adopting the new lease-accounting standard.