Star Gas Partners, L.P. — Fiscal 2015 Form 10-K Summary
Business Context and Reporting Period
The filing covers the fiscal year ended September 30, 2015. The company is a single-segment distributor of home heating oil and propane, provider of heating, air-conditioning and ancillary services, and seller of other petroleum products across 17 states and the District of Columbia. It served approximately 458,000 full-service customers, 76,000 delivery-only customers and 25,000 ancillary-service customers.
The company’s business is highly seasonal: approximately 80% of home heating oil and propane volume is sold during the October–March heating season. The filing’s fiscal fourth quarter ended September 30, 2015 and produced a net loss of $45.3 million, consistent with the company’s normal seasonal pattern.
Financial and Operating Metrics
| Metric | Fiscal 2015 | Fiscal 2014 | Change |
|---|---|---|---|
| Total sales | $1,674.3 million | $1,961.7 million | Down 14.6% |
| Product sales | $1,431.6 million | $1,734.5 million | Down 17.5% |
| Installation and service sales | $242.7 million | $227.2 million | Up 6.8% |
| Operating income | $93.6 million | $79.9 million | Up 17.2% |
| Net income | $37.6 million | $36.1 million | Up 4.1% |
| Net income per limited partner unit | $0.59 | $0.57 | Up $0.02 |
| Adjusted EBITDA | $140.5 million | $108.1 million | Up 30.0% |
| Cash flow from operations | $136.9 million | $95.2 million | Up 43.8% |
| Capital expenditures | $9.6 million | $9.1 million | Up 4.9% |
| Retail home heating oil and propane volume | 382.8 million gallons | 361.0 million gallons | Up 6.1% |
Total sales declined primarily because wholesale product costs fell by approximately $1.0006 per gallon, or 33.1%, despite higher volumes and margins. Reported net margin was approximately 2.2%, operating margin approximately 5.6%, and Adjusted EBITDA margin approximately 8.4%.
- Home heating oil and propane gross margin increased to $1.1062 per gallon from $1.0004 per gallon.
- Total product gross profit increased to $454.0 million from $385.0 million.
- Combined installation and service gross profit declined to $16.7 million from $21.4 million as service costs increased, partly because of colder weather and snow-related operating inefficiencies.
- Fiscal 2015 temperatures were approximately 5.0% colder than normal for the base business.
- Net customer attrition was 8,500 accounts, or 1.8%, compared with 4,100 accounts, or 0.9%, in fiscal 2014.
- Cash and cash equivalents were $100.5 million at September 30, 2015, compared with $49.0 million at September 30, 2014.
- Total assets were $707.0 million and partners’ capital was $289.9 million at year-end.
Debt, Liquidity and Distributions
- The company refinanced its $125.0 million of 8.875% senior notes due 2017 in September 2015 with a $100.0 million senior secured term loan and cash. The refinancing generated a $7.3 million loss on debt redemption but reduced future interest costs.
- At September 30, 2015, $100.0 million was outstanding under the term loan, with $10.0 million classified as current maturities. The term loan is due July 2020 and carried an effective interest rate of approximately 3.57% at year-end.
- No borrowings were outstanding under the revolving credit facility. The facility permits borrowings of up to $300 million, increasing to $450 million during December–April, subject to borrowing-base and covenant limitations.
- Availability under the revolver was $176.0 million. Letters of credit totaled $54.8 million and $15.3 million of hedge positions were secured under the facility.
- The company was in compliance with its fixed-charge coverage and senior secured leverage covenants at year-end.
- Fiscal 2015 cash distributions declared were $0.365 per common unit, compared with $0.340 in fiscal 2014. The fourth-quarter distribution was $0.095 per unit, or $0.38 annualized.
- Management estimated fiscal 2016 maintenance capital expenditures of approximately $8.4 million, plus $2.7 million for propane expansion, and expected approximately $21.8 million of distributions to common unitholders at the then-current quarterly rate.
Material Changes Versus the Prior Comparable Period
- Volume increased through acquisitions and colder weather, but lower commodity prices reduced reported revenue.
- Home heating oil and propane margins expanded materially; management stated that fiscal 2015 margins were unusually strong and expected them to contract.
- Adjusted EBITDA increased substantially, while net income rose only modestly because of higher taxes and unusual charges.
- Cash flow from operations improved by $41.7 million, aided by acquisitions, lower product costs and favorable receivables movements.
- Fiscal 2015 acquisitions added approximately 23,300 heating oil and propane accounts for approximately $20.8 million of aggregate purchase consideration.
- Customer attrition worsened to 1.8% from 0.9%, although management described the fiscal 2015 rate as among the lowest in the prior five years. Estimated losses from natural-gas conversions declined to 1.6% from 2.2%.
- The company’s customer mix shifted toward price-protected plans: residential price-protected volume rose to 48.1% from 45.9%, while residential variable-price volume declined to 37.9% from 39.8%.
Outlook, Commentary, Risks and Unusual Items
- Management intends to pursue selective acquisitions, expand propane and ancillary services, improve customer retention and grow geographically.
- Management cautioned that the fiscal 2015 per-gallon margins are not necessarily sustainable and expects margins to contract.
- A $17.8 million non-cash charge was recorded for a multiemployer pension withdrawal liability. The related undiscounted obligation is $48.0 million, payable over 30 years at approximately $1.6 million annually. A $7.0 million deferred tax benefit partially offset the charge, producing a net $10.8 million reduction in fiscal 2015 net income.
- The company’s major risks include warm winters, wholesale energy-price volatility, inability to pass through costs, customer attrition, conversions to natural gas, conservation, derivative and counterparty risk, covenant compliance, labor negotiations, environmental liabilities, self-insured claims and cyber risk.
- Approximately 40% of employees were covered by collective bargaining agreements. Four local bargaining units were in negotiations, two agreements were expired, and 14 additional agreements were scheduled for renewal in fiscal 2016.
- The company self-insured portions of workers’ compensation, automobile and general liability claims and carried approximately $60.5 million of net insurance reserves and $48.4 million of related letters of credit.
- The company had weather hedge contracts for fiscal 2016 and 2017 with maximum annual payouts of $12.5 million, but recorded no weather hedge benefit in fiscal 2015.
- In the first two months of fiscal 2016, the company acquired a motor-fuel dealer and a propane dealer for approximately $7.6 million.
Important Facts for Investors to Verify
- Whether fiscal 2015’s expanded home heating oil and propane margins persist or revert toward historical levels.
- Actual fiscal 2016 heating-season weather, volumes, customer attrition and natural-gas conversion rates.
- Compliance with revolving-credit availability, fixed-charge coverage and senior secured leverage covenants during peak working-capital periods.
- Cash requirements associated with the $48.0 million NETTI Fund withdrawal obligation, insurance reserves, letters of credit and derivative collateral.
- The sustainability of the $0.095 quarterly distribution and the company’s ability to fund distributions while pursuing acquisitions and capital investments.
- The impact of the shift toward price-protected customers and related derivative mark-to-market volatility.
- Integration results and internal-control coverage for the fiscal 2015 acquisition whose controls were excluded from management’s year-end assessment; the excluded acquisition represented $26.8 million of assets and $6.6 million of revenue.