Business Context and Reporting Period
Star Gas Partners, L.P. is a full-service distributor of home heating oil and propane, with installation, service, plumbing, security, and other petroleum-product operations. The filing covers the unaudited quarter and nine months ended June 30, 2017, Star Gas’s fiscal third quarter. Results are highly seasonal, with losses generally expected in the quarters ending June and September. The filing identifies the registrant as Star Gas Partners, L.P.; the request metadata identifies Star Group, L.P.
As of June 30, 2017, the Partnership served approximately 441,000 full-service residential and commercial heating-oil and propane customers, 73,000 delivery-only customers, 14,900 natural-gas and other heating-system service-contract customers, and approximately 29,100 home-security and plumbing customers.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Nine Months Ended June 30 |
|---|---|---|
| Total sales | $225.8 million, versus $218.2 million | $1,142.0 million, versus $999.3 million |
| Operating income (loss) | $(19.8) million, versus $(3.0) million | $82.5 million, versus $117.0 million |
| Net income (loss) | $(13.3) million, versus $(3.2) million | $44.6 million, versus $64.0 million |
| Limited partners’ income (loss) per unit | $(0.24), versus $(0.06) | $0.70, versus $0.95 |
| Adjusted EBITDA | $(9.3) million, versus $(7.8) million | $110.2 million, versus $116.9 million |
| Cash flow from operations | Not separately presented for the quarter | $23.2 million, versus $110.2 million |
Product sales increased 1.5% to $158.5 million in the quarter and 16.8% to $950.3 million year to date. Installation and service sales increased 8.6% to $67.3 million in the quarter and 3.2% to $191.7 million year to date.
- Home heating oil and propane volume was 40.5 million gallons in the quarter, down 9.4%, and 294.3 million gallons year to date, up 4.4%.
- Home heating oil and propane gross margin before derivative fair-value effects was $1.1455 per gallon in the quarter, compared with $1.0073, and $1.1360 year to date, compared with $1.1219.
- Total product gross profit was $54.3 million in the quarter, compared with $52.7 million, and $357.5 million year to date, compared with $340.0 million.
- Service and installation gross profit was $9.0 million in the quarter, compared with $8.7 million, but $8.5 million year to date, compared with $10.7 million.
- Reported results included a $3.1 million derivative fair-value charge in the quarter and a $7.0 million charge year to date, versus credits of $11.3 million and $20.1 million, respectively, in the comparable periods.
Balance Sheet, Debt, and Liquidity
- Cash and cash equivalents were $94.6 million at June 30, 2017, compared with $139.2 million at September 30, 2016; cash, cash equivalents, and restricted cash totaled $94.8 million.
- Total assets were $684.3 million, and partners’ capital was $329.1 million.
- Total debt was $78.2 million carrying value, or $78.8 million fair value, consisting of the senior secured term loan. There were no revolving-credit borrowings.
- The term loan declined from $91.6 million carrying value at September 30, 2016. The effective interest rate was approximately 4.01%, and the facility matures July 30, 2020.
- Letters of credit outstanding were $48.2 million, and $4.9 million of hedge positions were secured under the credit agreement.
- Availability under the revolving facility was $160.3 million. The Partnership was in compliance with its fixed-charge coverage and senior-secured leverage covenants at June 30, 2017.
- Year-to-date investing cash outflows were $35.2 million, including $9.3 million of capital expenditures, $14.5 million of acquisition payments, and $11.5 million for investments. Financing cash outflows were $32.4 million, including $13.7 million of term-loan repayments and $18.0 million of distributions.
Material Changes and Management Commentary
- Year-to-date revenue growth was driven by higher wholesale product costs, higher heating-oil and propane volume, and acquisitions. Colder weather increased year-to-date volume, while the third quarter was affected by temperatures 19.7% warmer than the prior-year quarter and 17.6% warmer than normal.
- Net customer attrition improved to 2,700 accounts, or 0.6%, for the nine months, compared with 13,700 accounts, or 3.0%, in the prior-year period. Management attributed the improvement to customer-experience, satisfaction, and retention initiatives.
- Year-to-date Adjusted EBITDA declined 5.7%, primarily because the prior year included a $12.5 million weather-hedge credit that did not recur, while service profitability declined and operating-staffing and technology expenditures increased.
- Operating cash flow declined sharply because colder weather and higher product costs increased receivables and product purchases, while customer credit balances declined.
- The Partnership completed five acquisitions through the third quarter for approximately $16.0 million, including heating-oil, propane, and plumbing businesses. Management said the acquired operations were not material individually or in aggregate.
Outlook, Risks, Contingencies, and Unusual Items
- No formal earnings or revenue guidance is provided. Management expects near-term capital requirements to be funded through operating cash flow, cash on hand, and, if necessary, the revolving credit facility.
- For the remainder of fiscal 2017, management estimated approximately $1.2 million of maintenance capital expenditures, $0.5 million for propane operations, and a $1.0 million pension contribution. It also planned to continue quarterly distributions at $0.11 per unit and pursue acquisitions and unit repurchases subject to liquidity and credit restrictions.
- Weather, wholesale fuel prices, customer consumption, customer attrition, natural-gas conversions, service pricing and staffing, counterparty credit, regulatory requirements, labor relations, and litigation are identified as material risks.
- Weather-hedge contracts can provide up to $12.5 million for fiscal years 2017 through 2019 if heating degree days are below specified thresholds; fiscal 2018 and 2019 contracts can also require payments of up to $5.0 million if degree days exceed specified thresholds. No weather-hedge benefit was realized during the nine months ended June 30, 2017.
- A putative class action concerning protected-price-plan benefits was refiled in April 2017 after the prior action was dismissed. No class has been certified, and the Partnership stated that it cannot currently assess the outcome or materiality.
- Operating leases had undiscounted future minimum payments of approximately $131.8 million through 2032. The filing states that the eventual discounted lease liabilities under the new lease standard cannot yet be estimated.
- The July 2017 quarterly distribution was declared at $0.11 per common unit, or $0.44 annualized, payable August 8, 2017.
Investor Verification Checklist
- Verify the sustainability of the $1.1360 year-to-date heating-oil and propane margin amid fuel-price and weather volatility.
- Reconcile reported net income and Adjusted EBITDA after excluding non-cash derivative fair-value effects and the nonrecurring $12.5 million prior-year weather-hedge credit.
- Monitor seasonal working-capital requirements, receivables, customer credit balances, cash levels, and revolving-facility availability.
- Assess service and installation profitability, including the effect of pricing, staffing, training, and technology investments.
- Review covenant compliance, required term-loan repayments, letters of credit, hedge collateral, and the July 2020 debt maturity.
- Evaluate customer attrition, natural-gas conversions, acquisition integration, and the pending protected-price-plan litigation.