SGU

Business Context and Reporting Period

Company: Star Gas Partners, L.P. (SGU) and subsidiaries, including Star Gas Finance Company.
Reporting Period: Quarterly period ended March 31, 2009 (Fiscal Q2 2009).
Business Overview: A master limited partnership operating as a retail distributor of home heating oil, propane, and related services in the Northeast and Mid-Atlantic regions. The company serves approximately 387,000 full-service residential and commercial customers.

Key Financial Metrics

Note: Figures are in thousands except per unit data. The filing does not provide a specific "Three Months" cash flow figure, only six-month data.

Material Changes vs. Prior Period

• Revenue Decline: Total sales decreased 21.8% year-over-year for the quarter and 17.5% for the six-month period. This was driven primarily by a 35.1% drop in wholesale home heating oil costs, which reduced selling prices, despite a 3.9% increase in heating oil volume due to colder weather.
• Profitability Surge: Net income increased 161% for the quarter and 51% for the six-month period. This was fueled by a $42.3 million non-cash gain from the change in fair value of derivative instruments and a $6.2 million gain on the redemption of debt.
• Margin Expansion: Realized home heating oil margins increased to $0.8524 per gallon (Q2) and $0.8644 per gallon (YTD), up from $0.7438 and $0.7229 in the prior year periods, as wholesale costs fell faster than retail prices.
• Debt Reduction: Long-term debt decreased by $36.6 million (from $173.8M to $137.2M) due to the repurchase of $36.3 million face value of 10.25% Senior Notes.
• Customer Attrition: Net customer loss increased to 13.9% for the six months ended March 31, 2009, compared to 11.2% in the prior year, driven by 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 lower than the comparable prior period due to net customer attrition and conservation, excluding weather impacts. Installation sales are expected to remain weak due to economic conditions.
• Liquidity: The company holds $175.9 million in cash. It has a revolving credit facility with $179.9 million in availability and is in compliance with all covenants. The facility expires in December 2009, with plans to extend or refinance in Spring/Summer 2009.
• Derivative Volatility: The company does not designate derivatives as hedging instruments under SFAS 133, resulting in significant earnings volatility from mark-to-market adjustments. A $42.3 million gain in Q2 2009 was largely non-cash.
• Legal Proceedings: A consolidated class action lawsuit (In re Star Gas Securities Litigation) remains pending on appeal. The company believes an unfavorable outcome is not probable and has not accrued a liability.
• Fixed Price Customers: Approximately 3.7% of the customer base renegotiated or terminated fixed-price contracts due to falling oil prices. Further terminations could adversely impact profitability.

Investor Verification Checklist

• Derivative Accounting: Verify the sustainability of earnings given the $42.3 million non-cash derivative gain in Q2 and the company's election not to use hedge accounting.
• Customer Attrition Rates: Monitor the 13.9% gross customer loss rate and the impact of economic downturns on credit quality and bad debt provisions.
• Debt Refinancing: Confirm the terms and availability of the revolving credit facility renewal in late 2009, given the tight credit market environment.
• Fixed Price Exposure: Assess the remaining exposure to fixed-price customers and the potential for further margin compression if oil prices continue to fluctuate.
• Legal Status: Track the status of the In re Star Gas Securities Litigation appeal, as an adverse ruling could have material financial consequences.