Star Gas Partners, L.P. — Form 10-Q Summary
Business context and reporting period
This filing is for the quarter and nine months ended June 30, 2015, within the fiscal year ending September 30, 2015. The filing identifies the registrant as Star Gas Partners, L.P. and describes a Northeast and Mid-Atlantic provider of home heating oil, propane, installations, repair and maintenance services, home security, plumbing, and other petroleum products. The partnership served approximately 446,000 full-service residential and commercial heating customers, approximately 75,000 delivery-only customers, and approximately 24,000 ancillary-services customers at June 30, 2015.
The business is highly seasonal: management reports that approximately 80% of annual heating-oil and propane volume is typically sold during the first two fiscal quarters. The June quarter generally produces a net loss.
Financial performance and key metrics
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Total sales | $245.6 million versus $326.5 million | $1.507 billion versus $1.739 billion |
| Operating income (loss) | $(10.1) million versus $(10.8) million | $154.8 million versus $120.0 million |
| Net income (loss) | $(8.4) million versus $(9.6) million | $82.9 million versus $61.9 million |
| Limited partner income (loss) per unit | $(0.15) versus $(0.17) | $1.21 versus $0.91 |
| Adjusted EBITDA | $(9.3) million versus $(8.3) million | $163.6 million versus $130.4 million |
| Operating cash flow | Not separately presented in the quarterly cash-flow statement | $96.2 million versus $5.3 million |
For the nine-month period, product gross profit increased to $420.8 million from $357.1 million. Home heating oil and propane gross margin increased to $1.1008 per gallon from $1.0044 per gallon. Total home heating oil and propane volume increased 6.8% to 361.7 million gallons, largely because the prior-year period included less contribution from the Griffith acquisition. In the June quarter, volume declined 5.6% to 44.5 million gallons, with temperatures 14.9% warmer than the prior-year quarter and 22.4% warmer than normal.
Installation and service sales increased 7.7% for the nine-month period, but combined installation and service gross profit declined to $7.4 million from $11.8 million. Management attributed higher costs to colder winter conditions, snowstorms, premium labor rates, service expansion, and training initiatives.
Balance sheet, debt, liquidity, and cash flow
- Cash and cash equivalents were $122.6 million at June 30, 2015, compared with $49.0 million at September 30, 2014.
- Total assets were $743.9 million, compared with $685.1 million at September 30, 2014. Total partners’ capital was $340.7 million, compared with $273.2 million.
- Total debt was $124.7 million at carrying value, consisting of the 8.875% Senior Notes. No revolving-credit borrowings were outstanding.
- The Senior Notes had a $125.0 million face amount and were due in December 2017. The balance sheet classified $25.0 million as current.
- Availability under the then-existing revolving credit facility was $232.2 million. Letters of credit totaled $54.8 million, and $2.5 million of hedge positions were secured under the facility.
- In July 2015, the partnership entered into a new $300 million asset-based revolving facility, expandable to $450 million during the heating season, plus a $100 million five-year amortizing senior secured term loan. The facility maturity was extended to July 2020.
- Capital expenditures were $5.2 million for the nine months, versus $6.5 million in the prior-year period. Investing cash flow was $(6.1) million, compared with $(104.3) million, primarily because the prior-year period included the Griffith acquisition.
- Financing cash flow was $(16.4) million, including $15.7 million of distributions and $0.7 million of unit repurchases.
Material changes versus the prior comparable period
- Nine-month net income increased 33.9% to $82.9 million, and Adjusted EBITDA increased 25.5% to $163.6 million.
- Revenue declined because lower wholesale product prices more than offset higher volumes and improved per-gallon margins. Product sales declined 15.6% for the nine-month period.
- Operating cash flow improved by $90.9 million, primarily because of lower receivables and inventory requirements associated with lower product costs, as well as favorable working-capital changes.
- The Griffith acquisition contributed to higher volume, sales, depreciation and amortization, delivery costs, and service costs in the current period.
- Net customer attrition was 4,500 accounts, or 1.0%, for the nine months, compared with 2,900 accounts, or 0.7%, in the prior-year period. Natural-gas conversions accounted for 1.3% of home heating oil accounts lost versus 1.6% previously.
- The proportion of heating-oil volume sold under residential price-protected plans increased to 48.0% from 45.9% for the nine-month period and to 52.2% from 48.0% in the June quarter.
Guidance, outlook, risks, contingencies, and unusual items
- Management did not provide formal earnings guidance in the filing. It stated that the unusually high 2015 per-gallon margins may not be sustainable.
- The partnership elected to redeem all $125.0 million of Senior Notes at 104.438% of face value plus accrued interest, with a September 3, 2015 redemption date. The planned funding sources were the $100 million term loan and cash on hand, including distributions from corporate subsidiaries.
- A quarterly distribution of $0.095 per common unit was declared in July 2015, or $0.38 annualized.
- Key operating risks include weather variability, wholesale fuel-price volatility, customer conservation, price-protected customer renewals, customer and counterparty credit risk, natural-gas conversions, labor and union matters, environmental and safety regulation, and the ability to maintain margins and supply.
- Derivative instruments are marked to market through earnings rather than designated as cash-flow hedges, creating potentially significant non-cash earnings volatility. At June 30, derivative assets totaled $15.5 million and derivative liabilities totaled $17.3 million before balance-sheet netting.
- Two multi-employer pension plans were classified as “red zone” plans with funding below 65%. A potential alternate funding arrangement could require a non-cash charge equal to the present value of future payments; the amount and outcome were not determined.
- The partnership reported no litigation expected by management to have a material adverse effect, but insurance may not cover all potential hazardous-material, environmental, or other claims.
- The filing states that disclosure controls and procedures were effective as of June 30, 2015, and that no material change in internal control occurred during the quarter.
Most important facts for investors to verify
- Whether the Senior Notes were redeemed as planned on September 3, 2015 and the resulting interest expense, redemption premium, and leverage.
- Final borrowing, availability, covenant compliance, and amortization terms under the July 2015 credit facility and term loan.
- Whether elevated per-gallon margins and the $163.6 million nine-month Adjusted EBITDA level are sustainable after seasonal and commodity effects.
- Price-protected customer renewal rates, ongoing customer attrition, and the pace of natural-gas conversions.
- The cash-tax consequences to the partnership and unitholders of distributions from corporate subsidiaries used to fund the debt redemption.
- Any required contribution, withdrawal liability, or non-cash accounting charge related to the underfunded multi-employer pension plans.
- The effect of derivative fair-value movements and hedge collateral requirements on future earnings and liquidity.