Business Context and Reporting Period
Company: Star Gas Partners, L.P. (SGU) and subsidiaries, including Star Gas Finance Company.
Reporting Period: Quarterly report (Form 10-Q) for the period ended June 30, 2009.
Business Overview: A master limited partnership operating as a home heating oil distributor and services provider in the Northeast and Mid-Atlantic regions. The company serves approximately 381,000 full-service residential and commercial customers and 7,000 propane customers. Operations are conducted primarily through Petro Holdings, Inc.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended June 30, 2009 |
Nine Months Ended June 30, 2009 |
Nine Months Ended June 30, 2008 |
|---|---|---|---|
| Total Sales | $167,669 | $1,091,019 | $1,377,297 |
| Net Income (Loss) | $(1,924) | $98,732 | $78,501 |
| Operating Income | $956 | $104,470 | $93,001 |
| Adjusted EBITDA | $(4,956) | $105,259 | $67,591 |
| Cash from Operating Activities | N/A | $80,808 | $(18,345) |
| Cash and Equivalents (Balance) | $217,416 | $217,416 | $90,925 |
| Long-Term Debt | $137,131 | $137,131 | $173,752 |
| Product Gross Margin (per gallon) | $0.8999 | $0.8869 | $0.7284 |
Note: Adjusted EBITDA is a non-GAAP measure. Net income for the three months ended June 30, 2009, reflects a loss primarily due to lower non-cash gains on derivatives compared to the prior year.
Material Changes vs. Prior Period
- Revenue Decline: Total sales for the nine months ended June 30, 2009, decreased 20.8% to $1.09 billion compared to $1.38 billion in the prior year. This was driven by a 19.3% decrease in home heating oil selling prices and a 37.0% decrease in other petroleum product prices, despite volume remaining relatively flat due to colder weather offsetting customer attrition.
- Profitability Improvement (YTD): Net income for the nine months increased 25.8% to $98.7 million from $78.5 million. This increase was driven by higher product gross profit margins (up $0.1584 per gallon), a $9.7 million gain on the redemption of debt, and lower interest expense due to debt repurchases.
- Quarterly Loss: The company reported a net loss of $1.9 million for the quarter ended June 30, 2009, compared to net income of $11.8 million in the same period in 2008. This was largely due to a $20.4 million reduction in non-cash gains from the fair value of derivative instruments.
- Debt Reduction: Long-term debt decreased by approximately $36.6 million year-over-year as the company repurchased $36.3 million face value of its 10.25% Senior Notes, recording a gain of $9.7 million.
- Customer Attrition: Net customer loss for the nine months was 6.0% (24,200 accounts), an increase from 4.3% in the prior year, attributed to price competition and credit-related losses.
Guidance, Outlook, and Risks
- Outlook: Management expects home heating oil volume for the remainder of fiscal 2009 to be less than the comparable period in fiscal 2008, excluding weather and acquisition impacts, due to net customer attrition and conservation. Installation sales are expected to remain lower due to economic conditions and reduced consumer confidence.
- Liquidity: The company maintains a revolving credit facility of up to $240 million ($290 million during the heating season). As of June 30, 2009, availability was $194.4 million. The company is in compliance with its fixed charge coverage ratio covenant.
- Repurchase Programs: In July 2009, the Board authorized the repurchase of up to $20 million in Senior Notes and up to 7.5 million common units. The company subsequently repurchased $1.8 million in notes.
- Distributions: A quarterly distribution of $0.0675 per unit was declared for the second quarter of fiscal 2009.
- Risks:
- Weather Dependence: Demand is highly sensitive to heating degree days. A warm winter could significantly reduce volume.
- Commodity Price Volatility: Fluctuations in wholesale heating oil prices impact liquidity and margins, particularly regarding hedging requirements and customer credit balances.
- Customer Attrition: Continued economic downturns may lead to increased customer losses and bad debt expenses.
- Legal Proceedings: A consolidated class action lawsuit regarding securities violations remains pending on appeal; management believes an unfavorable outcome is not probable but could be material if decided adversely.
Investor Verification Checklist
- Derivative Accounting Impact: Verify the volatility in reported earnings caused by the mark-to-market accounting of derivative instruments, which resulted in a quarterly loss despite positive operating cash flow.
- Customer Attrition Rates: Monitor the trend of net customer losses (6.0% YTD) and the effectiveness of marketing efforts in offsetting price-driven churn.
- Debt Covenant Compliance: Confirm continued compliance with the fixed charge coverage ratio (1.1 to 1.0) and minimum availability ($43.5 million) under the revolving credit facility.
- Weather Sensitivity: Assess the impact of actual heating degree days versus the 10-year average on volume and revenue for the upcoming heating season.
- Capital Allocation: Track the execution of the authorized $20 million debt repurchase and 7.5 million unit buyback programs.