Business Context and Reporting Period
Star Gas Partners, L.P. is a home heating oil and propane distributor and services provider operating primarily in the Northeast, Mid-Atlantic, Central and Southeast United States. The Partnership serves approximately 437,000 full-service residential and commercial customers, approximately 71,000 delivery-only customers and approximately 27,000 home security and plumbing customers. It also provides heating, air-conditioning, plumbing, security and related services.
This Form 10-K covers the fiscal year ended September 30, 2016. The business is highly seasonal, with approximately 80% of annual home heating oil and propane volume sold during the October-through-March heating season.
Financial Performance and Key Metrics
| Metric | Fiscal 2016 | Fiscal 2015 | Change |
|---|---|---|---|
| Total sales | $1.161 billion | $1.674 billion | Down 30.6% |
| Product sales | $911.0 million | $1.4316 billion | Down 36.4% |
| Installations and services sales | $250.3 million | $242.7 million | Up 3.1% |
| Operating income | $87.4 million | $93.6 million | Down 6.6% |
| Net income | $44.9 million | $37.6 million | Up 19.6% |
| Net income per limited partner unit | $0.70 | $0.59 | Up $0.11 |
| EBITDA | $113.9 million | $111.2 million | Up 2.5% |
| Adjusted EBITDA | $95.7 million | $140.5 million | Down 31.9% |
| Operating cash flow | $102.0 million | $136.9 million | Down 25.5% |
| Retail home heating oil and propane volume | 302.5 million gallons | 382.8 million gallons | Down 21.0% |
Approximate margins based on reported figures were 7.5% for operating income and 3.9% for net income in fiscal 2016, compared with 5.6% and 2.2%, respectively, in fiscal 2015. Product gross profit declined to $371.2 million from $454.0 million, primarily because of lower volume, partially offset by improved home heating oil and propane margins.
Home heating oil and propane gross margin increased to $1.1222 per gallon from $1.1062 per gallon. The decline in wholesale product costs supported margin expansion, but management cautioned that these margin levels may not be sustainable.
Cash and cash equivalents were $139.2 million at September 30, 2016, compared with $100.5 million at September 30, 2015. Total debt was $92.5 million, consisting of a senior secured term loan; there were no revolving credit borrowings. Revolving facility availability was $163.4 million, after $50.6 million of letters of credit and $0.3 million of secured hedge positions. Long-term debt matures in July 2020, subject to scheduled and excess-cash-flow repayments.
Capital expenditures were $10.1 million, and acquisitions used $9.8 million of cash. Financing activities included $23.1 million of distributions, $12.0 million of unit repurchases and $7.5 million of term-loan repayments.
Material Changes Versus the Prior Comparable Period
- Fiscal 2016 was materially warmer: temperatures were 17.8% warmer than normal and 21.6% warmer than fiscal 2015 for comparable operations. Weather reduced heating oil and propane volume by an estimated 78.1 million gallons.
- Net customer attrition deteriorated to 5.1%, or 23,500 accounts, from 1.8%, or 8,500 accounts, in fiscal 2015. The filing attributes the deterioration to warm weather, aggressive competitor pricing, customer moves and account classification changes.
- Product sales fell sharply because of lower wholesale prices and lower volume, while installations and services sales increased $7.6 million.
- Adjusted EBITDA declined $44.8 million despite lower operating costs, improved product margins and a $12.5 million weather-hedge recovery.
- Net income increased because lower interest expense, the absence of the prior-year $7.3 million debt-redemption loss and a lower effective tax rate more than offset the operating decline.
- Interest expense declined to $7.5 million from $14.1 million following the 2015 refinancing of $125.0 million of 8.875% senior notes with a $100.0 million term loan and cash.
- The Partnership completed four acquisitions for approximately $9.8 million, adding approximately 3,300 home heating oil and propane accounts. This was substantially smaller than the prior year's acquisition activity.
- The Partnership repurchased and retired 1.395 million common units for approximately $12.0 million, leaving 2.207 million units authorized for repurchase under the stated program.
Guidance, Outlook, Risks and Unusual Items
- Management plans to invest approximately $9.9 million in fiscal 2017 maintenance capital expenditures and an additional $4.0 million in propane operations.
- At the then-current quarterly distribution of $0.1025 per unit, fiscal 2017 distributions were estimated at approximately $22.9 million to common unitholders, plus payments to the general partner and management incentive plan participants.
- The Partnership expected to make approximately $6.2 million of additional term-loan repayment in December 2016 from fiscal 2016 excess cash flow, in addition to scheduled quarterly repayments. It also expected to pay $1.6 million under the NETTI pension agreement and make a $2.0 million optional pension contribution.
- Weather hedges for fiscal 2017 and 2018 provide up to $12.5 million of protection per year for heating-degree-day shortfalls, but may not fully offset warm-weather effects.
- Derivative instruments are not designated as accounting hedges. Mark-to-market changes therefore create earnings volatility; fiscal 2016 included an $18.2 million derivative fair-value credit, compared with a $4.2 million charge in fiscal 2015.
- The Partnership entered into an agreement relating to the New England Teamsters and Trucking Industry Pension Fund that created an undiscounted withdrawal obligation of $48.0 million, payable over 30 years. The remaining balance at September 30, 2016 was $17.7 million on the balance sheet, with a fair value of $20.7 million.
- Approximately 41% of employees were covered by 57 collective bargaining agreements, and agreements covering approximately 544 employees were scheduled for renewal in fiscal 2017. Labor negotiations, strikes and higher labor costs remain risks.
- The home heating oil market is mature and faces ongoing customer conversions to natural gas, conservation, energy efficiency, competitive pricing pressure and weather volatility. Fiscal 2016 estimated customer losses from natural-gas conversions were 1.3%.
- A putative class action alleges that customers did not receive expected benefits under protected-price contracts. No class had been certified, the Partnership had moved to dismiss, and the filing states that the potential outcome and materiality could not be assessed.
- The Partnership has substantial environmental, insurance, pension, commodity, counterparty, regulatory, cybersecurity and liquidity risks. Net self-insurance reserves were approximately $64.1 million at September 30, 2016.
- The filing reports effective disclosure controls and effective internal control over financial reporting as of September 30, 2016, with an unqualified independent auditor opinion.
Most Important Facts for Investors to Verify
- Whether customer attrition can be reduced from the 5.1% fiscal 2016 level and whether heating volumes normalize after the unusually warm year.
- Whether the $1.1222 per-gallon home heating oil and propane margin is sustainable under changing wholesale prices and competitive conditions.
- The reconciliation and comparability of the reported $95.7 million Adjusted EBITDA figure; the compensation discussion elsewhere in the filing refers to fiscal 2016 Adjusted EBITDA of $84.7 million, creating an apparent disclosure inconsistency.
- Compliance with credit-agreement availability, fixed-charge coverage and leverage covenants after scheduled and excess-cash-flow debt repayments.
- The cash-flow impact of distributions, unit repurchases, acquisitions, capital spending, pension obligations and seasonal working-capital requirements.
- The potential cost and timing of the NETTI pension obligation and other underfunded multiemployer pension plans.
- The outcome and potential exposure from the protected-price customer litigation.
- The effect of natural-gas conversions, environmental regulation, commodity hedging results and weather-hedge recoveries on future earnings and distributions.