Business Context and Reporting Period
Star Gas Partners, L.P. is a master limited partnership providing home heating oil, propane, heating and air-conditioning installation and service, home security, plumbing, and delivery-only petroleum products. The partnership served approximately 446,000 full-service residential and commercial heating customers and approximately 74,000 delivery-only customers as of June 30, 2016.
This unaudited Form 10-Q covers the three and nine months ended June 30, 2016, the partnership’s fiscal third quarter and first nine months. Results are highly seasonal, with losses typically occurring in the quarters ending June and September.
Financial Metrics
| Metric | Three Months Ended June 30, 2016 | Year-over-Year Change | Nine Months Ended June 30, 2016 | Year-over-Year Change |
|---|---|---|---|---|
| Total sales | $218.2 million | Down 11.2% | $999.3 million | Down 33.0% |
| Operating income (loss) | $(3.0) million | Improved from $(10.1) million | $117.0 million | Down 24.4% |
| Net income (loss) | $(3.2) million | Improved from $(8.4) million | $64.0 million | Down 22.7% |
| Net income (loss) per limited partner unit | $(0.06) | Improved from $(0.15) | $0.95 | Down from $1.21 |
| Adjusted EBITDA | $(7.8) million | Improved from $(9.3) million | $116.9 million | Down 28.6% |
| Net cash provided by operating activities | Not separately provided in the statement for the quarter | — | $110.2 million | Up from $96.2 million |
Calculated operating margins were approximately negative 1.4% for the quarter and 11.7% for the nine-month period. Net margins were approximately negative 1.5% and 6.4%, respectively.
- Third-quarter product sales declined 15.5% to $156.2 million, primarily because wholesale product costs fell 26.6%, while total product volume increased 6.0%.
- Nine-month product sales declined 38.6% to $813.5 million as wholesale costs fell 37.0% and home heating oil and propane volume declined 22.1% to 281.9 million gallons.
- Home heating oil and propane gross margin increased to $1.1219 per gallon for the nine-month period from $1.1008 per gallon; third-quarter margin was substantially unchanged at $1.0073 per gallon.
- Cash and cash equivalents were $171.2 million at June 30, 2016, compared with $100.5 million at September 30, 2015.
- Total debt was $95.0 million, consisting entirely of the senior secured term loan; there were no revolving credit borrowings. Availability under the revolving facility was $221.9 million, with $49.1 million of letters of credit outstanding.
- Capital expenditures were $7.2 million and acquisitions totaled $8.8 million during the first nine months. Financing uses included $17.1 million of distributions, $5.0 million of term-loan repayments, and $0.7 million of unit repurchases.
Material Changes Versus the Prior Comparable Period
- The first nine months were 21.6% warmer than the prior-year period and 17.8% warmer than normal, driving a 22.1% decline in heating oil and propane volume.
- Net customer attrition worsened to 13,700 accounts, or 3.0%, from a net loss of approximately 4,500 accounts, or 1.0%, in the prior-year period. Management attributed the deterioration to warm weather, lower wholesale prices enabling aggressive competitor pricing, and customer price sensitivity.
- Service and installation gross profit improved to $10.7 million from $7.4 million for the first nine months, while delivery and branch expenses fell 12.3% to $218.8 million.
- Derivative fair-value credits increased to $20.1 million from $9.8 million for the first nine months. These non-cash mark-to-market effects contributed materially to reported operating results and may reverse in future periods.
- Interest expense fell 49.1% to $5.5 million following the September 2015 refinancing of $125.0 million of 8.875% senior notes with a lower-rate term loan and cash.
- The partnership received the $12.5 million maximum payment under its weather hedge for the fiscal 2016 heating season. The credit reduced delivery and branch expenses.
- The partnership completed three acquisitions for approximately $8.8 million during fiscal 2016, compared with one acquisition for $1.1 million in the prior-year period.
Guidance, Outlook, Risks and Unusual Items
- Management estimated remaining fiscal 2016 maintenance capital expenditures of $2.5 million to $3.5 million, plus approximately $1.0 million for propane operations.
- The partnership expected approximately $5.0 million of additional term-loan repayments for fiscal 2016 based on anticipated excess cash flow and intended to continue distributions and unit repurchases subject to facility constraints.
- A quarterly distribution of $0.1025 per common unit was declared in July 2016, or $0.41 annualized, with approximately $5.9 million payable to common unitholders.
- The partnership’s liquidity is sensitive to weather, wholesale fuel prices, hedging collateral and margin requirements, customer credit, customer attrition, natural-gas conversions, and its ability to pass product-cost changes to customers.
- Derivative positions are economic hedges rather than accounting hedges. Mark-to-market gains and losses can cause significant earnings volatility before the underlying fuel transactions occur.
- A proposed class action alleges that protected-price-plan customers were denied contractual benefits after oil prices declined. No class had been certified as of the filing, the partnership had moved to dismiss, and management stated that the potential outcome and materiality could not be assessed.
- The partnership reported compliance with its fixed-charge coverage and senior secured leverage covenants. The term loan bears variable interest; management estimated that a 100-basis-point rate increase would reduce annual after-tax cash flow by approximately $0.6 million.
Investor Verification Priorities
- Verify whether warmer weather and customer attrition continue to reduce heating oil and propane volume and whether the reported per-gallon margins remain sustainable.
- Reconcile Adjusted EBITDA with GAAP earnings and cash flow, particularly the impact of non-cash derivative fair-value credits and the $12.5 million weather-hedge payment.
- Confirm available borrowing capacity, letters of credit, covenant compliance, scheduled term-loan repayments, and variable-rate exposure.
- Assess the sustainability of distributions and unit repurchases relative to operating cash flow, capital expenditures, acquisitions, taxes, and debt service.
- Monitor the protected-price-plan litigation, customer attrition, natural-gas conversions, acquisition integration, and the effectiveness of internal controls as acquired operations are integrated.