Business Context and Reporting Period
Company: Star Gas Partners, L.P. (SGU)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2011 (Second Quarter of Fiscal Year 2011)
Business Overview: Star Gas Partners is a master limited partnership and a retail distributor of home heating oil and propane, primarily serving residential and commercial customers in the Northeast and Mid-Atlantic regions. The company also provides installation, maintenance, and repair services for heating and air conditioning equipment. Operations are conducted through its subsidiary, Petro Holdings, Inc.
Key Financial Metrics
All figures in thousands, except per unit data.
| Metric | Three Months Ended Mar 31, 2011 | Six Months Ended Mar 31, 2011 |
|---|---|---|
| Total Sales | $731,865 | $1,191,366 |
| Net Income | $48,681 | $69,239 |
| Net Income (Limited Partners) | $48,445 | $68,904 |
| Diluted EPS (Limited Partners) | $0.61 | $0.86 |
| Operating Income | $87,959 | $131,610 |
| Adjusted EBITDA | $79,397 | $113,719 |
| Cash and Cash Equivalents | $11,820 (Mar 31, 2011) | $11,820 (Mar 31, 2011) |
| Total Debt | $155,812 (Mar 31, 2011) | $155,812 (Mar 31, 2011) |
| Revolving Credit Facility Borrowed | $31,593 | $31,593 |
| Net Cash Used in Operating Activities | $(13,982) | $(102,692) |
Material Changes vs. Prior Period
- Revenue Growth: Total sales increased 32.6% for the three months ended March 31, 2011, compared to the same period in 2010. This was driven by a 13.5% increase in retail volume (178.9 million gallons vs. 157.7 million gallons) and higher wholesale product costs.
- Profitability: Net income rose 20.1% to $48.7 million for the quarter. Operating income increased 17.1% to $88.0 million.
- Volume Drivers: Volume growth was attributed to colder temperatures (8.7% colder than the prior year quarter) and acquisitions. However, net customer attrition in the base business offset some gains.
- Derivative Impact: The company recorded a $13.3 million net credit from the increase in the fair value of derivative instruments for the quarter, compared to a $4.7 million credit in the prior year. This non-cash gain significantly boosted reported earnings.
- Debt Restructuring: In November 2010, the company issued $125 million of 8.875% Senior Notes due 2017 and used proceeds to redeem $82.5 million of 10.25% Senior Notes due 2013. This reduced the weighted average borrowing rate despite an increase in total debt.
- Cash Flow: Net cash used in operating activities increased to $102.7 million for the six-month period (vs. $76.0 million prior year), primarily due to a $77.0 million increase in cash needed to fund accounts receivable driven by higher sales volume and product costs.
Guidance, Outlook, and Risks
- Weather Sensitivity: The business is highly seasonal and weather-dependent. The second quarter is the peak heating season. Colder weather drives volume but increases working capital needs.
- Price Volatility: Escalating wholesale product costs limit the ability to expand per-gallon margins for price-protected customers. Over 90% of ceiling customers reached their maximum contract price in Q2 2011.
- Customer Attrition: Net customer attrition increased to 1.8% for the six months ended March 31, 2011, compared to 1.5% in the prior year, largely due to higher prices and conversions to natural gas.
- Liquidity: The company maintains a $240 million revolving credit facility (expandable to $290 million during heating season). As of March 31, 2011, availability was $181.5 million. The company is in compliance with all financial covenants.
- Tax Structure: Management is considering an election to be taxed as a corporation to reduce administrative costs associated with the current partnership structure, though no decision has been made.
- Distributions: A quarterly distribution of $0.0775 per unit was declared on April 14, 2011, payable May 13, 2011.
Investor Verification Checklist
- Derivative Valuation: Verify the magnitude of non-cash gains/losses from derivative instruments ($13.3M gain in Q2) and their impact on reported net income versus Adjusted EBITDA.
- Working Capital Trends: Monitor the increase in Days Sales Outstanding (35.6 days vs. 32.3 days prior year) and the cash burn associated with funding receivables during peak seasons.
- Margin Compression: Assess the impact of rising wholesale oil prices on per-gallon gross margins, which declined slightly to $0.9177 per gallon in Q2 2011.
- Debt Covenants: Confirm continued compliance with the fixed charge coverage ratio (1.10x minimum) and availability requirements ($43.5 million minimum) under the revolving credit facility.
- Customer Retention: Track net customer attrition rates, particularly regarding conversions to natural gas and price sensitivity among price-protected customers.