Business Context and Reporting Period
Filing: Star Gas Partners, L.P. Form 10-Q for the quarter and six months ended March 31, 2016. The filing identifies the registrant as Star Gas Partners, L.P., although the request metadata references Star Group, L.P.
The Partnership distributes home heating oil and propane, sells other petroleum products, provides installation, service, security and plumbing offerings, and serves approximately 452,000 full-service residential and commercial customers plus approximately 79,000 delivery-only customers. Results are highly seasonal, with the second fiscal quarter representing the peak heating season.
Financial Highlights
| Metric | Three Months Ended March 31 | Six Months Ended March 31 |
|---|---|---|
| Total sales | $462.0 million, down 39.4% | $781.1 million, down 38.1% |
| Operating income | $96.3 million, down 28.2% | $120.0 million, down 27.2% |
| Net income | $55.2 million, down 27.1% | $67.3 million, down 26.3% |
| Limited partners’ income per unit | $0.79 versus $1.08 | $0.98 versus $1.31 |
| Adjusted EBITDA | $88.7 million, down 30.5% | $124.7 million, down 27.9% |
| Net cash from operating activities | Not separately reported in the condensed cash-flow statement | $74.2 million versus $3.6 million |
Reported net margins were approximately 11.9% for the quarter and 8.6% year to date, compared with approximately 9.9% and 7.2%, respectively, in the prior-year periods. The comparison is affected by commodity-price movements and non-cash derivative fair-value changes.
- Home heating oil and propane volume declined 25.1% for the quarter and 25.2% year to date, primarily because weather was 26.3% and 26.6% warmer, respectively, than the prior-year periods.
- Home heating oil and propane gross margin before derivative fair-value effects increased to $1.1242 per gallon for the quarter and $1.1436 per gallon year to date, versus $1.1207 and $1.1139, respectively.
- Installations and services sales increased 2.5% for the quarter and 2.7% year to date. The combined service and installation result improved to a $1.2 million loss for the quarter and a $2.0 million profit year to date.
- Derivative fair-value credits were $14.3 million for the quarter and $8.8 million year to date. These non-cash gains can create significant period-to-period earnings volatility.
Balance Sheet, Debt and Liquidity
| Item | March 31, 2016 | September 30, 2015 |
|---|---|---|
| Cash and cash equivalents | $146.6 million | $100.5 million |
| Total assets | $794.0 million | $707.0 million |
| Total debt | $97.5 million | $100.0 million |
| Partners’ capital | $346.1 million | $289.9 million |
| Revolving facility borrowings | None | None |
| Credit facility availability | $242.5 million | $176.0 million |
- The debt balance consisted of a $97.5 million senior secured term loan at an effective interest rate of approximately 3.58%; the revolving facility was undrawn.
- The credit facility matures July 30, 2020 and provides a $300 million revolving commitment, increasing to $450 million during the heating season, subject to borrowing-base limitations and covenants.
- Letters of credit outstanding were $49.6 million, and $7.9 million of hedge positions were secured under the credit agreement.
- The Partnership reported compliance with its fixed-charge coverage and senior secured leverage covenants.
Material Changes Versus Prior Comparable Period
- Sales, operating income, net income and Adjusted EBITDA declined primarily because of exceptionally warm weather and lower wholesale fuel prices, which reduced volume and reported revenue.
- Wholesale product cost declined approximately 39% year over year, while total product gross profit declined because the volume reduction outweighed improved per-gallon margins.
- Net customer attrition was 7,000 accounts, or 1.5%, in the first six months of fiscal 2016, compared with net customer growth of 2,100 accounts, or 0.5%, in the prior-year period. Management attributed the deterioration to warm weather, lower competing fuel prices and customers seeking lower prices.
- Interest expense declined 48.5% year to date following the September 2015 refinancing, in which $125 million of 8.875% senior notes were redeemed and replaced with a lower-rate $100 million term loan plus cash.
- Operating cash flow increased substantially because of lower product purchases and costs and favorable working-capital changes, particularly accounts receivable and customer credit balances.
- The Partnership completed two acquisitions during fiscal 2016 for approximately $7.6 million; management stated that their impact was not material to consolidated results.
Outlook, Commentary, Risks and Unusual Items
- No formal full-year earnings guidance is provided in the filing. Management expects near-term capital requirements to be funded by cash on hand, operating cash flow and, if needed, the revolving facility.
- For the remainder of fiscal 2016, maintenance capital expenditures were estimated at approximately $4.2 million, with an additional $1.3 million planned for propane operations.
- The Partnership declared a quarterly distribution of $0.1025 per common unit, or $0.41 annualized, payable May 6, 2016. Management also expected to continue unit repurchases and pursue acquisitions within liquidity and covenant constraints.
- A weather hedge generated a $12.5 million receivable for the five-month heating period ended March 31, 2016; the amount was collected in April 2016. Management noted that October 2015 through March 2016 was the second-warmest such period in the past 30 years.
- Key risks include weather variability, fuel-price volatility, customer attrition and natural-gas conversions, difficulty sustaining current per-gallon margins, hedging and counterparty exposure, working-capital requirements, environmental and operating hazards, union matters, regulation and acquisition execution.
- A proposed class action alleges that customers were denied expected benefits under protected-price-plan contracts. No class had been certified, damages were unspecified, and the Partnership stated that it could not assess the outcome.
- The Partnership disclosed a remaining New England Teamsters and Trucking Industry Pension Fund withdrawal liability of approximately $17.7 million, with a reported fair value of $17.1 million.
Most Important Facts for Investors to Verify
- Whether customer attrition and natural-gas conversions continue to reduce the recurring customer base after the unusually warm heating season.
- Whether the improved per-gallon margins can be sustained as fuel prices, competition and pricing-plan mix change.
- The effect of derivative mark-to-market volatility on reported earnings and the eventual settlement economics of hedged positions.
- Compliance with credit-facility availability, fixed-charge coverage and leverage covenants, particularly during future heating seasons.
- Cash requirements for debt amortization, distributions, unit repurchases, acquisitions and planned capital expenditures.
- The potential financial and operational impact of the protected-price-plan litigation and the pension withdrawal liability.