SGU

Business Context and Reporting Period

Company: Star Gas Partners, L.P. (Star Gas Partners)

Filing Type: Form 10-K (Annual Report)

Reporting Period: Fiscal year ended September 30, 2009

Business Overview: Star Gas Partners is a master limited partnership and the largest retail distributor of home heating oil in the United States. Operations are conducted through its subsidiary, Petro Holdings, Inc., serving approximately 374,000 full-service residential and commercial customers in the Northeast and Mid-Atlantic regions. The company also provides propane, gasoline, diesel, and ancillary home services (heating/AC repair, plumbing, security).

Key Financial Metrics

Per Unit Data: Net income per limited partner unit was $1.43 for 2009, compared to a loss of $0.18 in 2008. Cash distribution declared per common unit was $0.2025 for 2009.

Material Changes vs. Prior Period

• Revenue Decline: Total sales decreased 21.8% to $1.207 billion, driven by a 20.0% decrease in home heating oil selling prices and a 0.5% decrease in volume. Despite lower prices, product gross profit increased by $52.5 million due to improved per-gallon margins ($0.8935 in 2009 vs. $0.7413 in 2008).
• Profitability Surge: Net income swung from a $13.4 million loss in 2008 to a $131.0 million profit in 2009. This was primarily due to a $76.8 million increase in operating income and a significant non-cash income tax benefit of $57.6 million resulting from the release of a valuation allowance on deferred tax assets.
• Debt Reduction: Long-term debt decreased by $40.6 million to $133.1 million following the repurchase of $40.3 million face value of 10.25% Senior Notes, which generated a $9.7 million gain.
• Customer Attrition: Net customer attrition increased to 7.5% (30,200 accounts lost) in 2009, compared to 4.4% in 2008. This was attributed to price competition and customers renegotiating protected price plans following the drop in wholesale oil prices.

Guidance, Outlook, and Risks

• Outlook: Management expects to maintain distributions and continue unit repurchases. The company anticipates paying approximately $19.5 million in distributions in fiscal 2010. Capital expenditures are estimated at $3.0 to $5.0 million annually.
• Tax Election: The Partnership is actively considering electing to be taxed as a corporation in calendar 2010 or thereafter to reduce administrative costs associated with K-1 filings, though this could have short-term tax implications for unitholders.
• Key Risks:
  • Weather Sensitivity: Financial performance is highly dependent on heating degree days. A warm weather hedge is in place for the 2009-2010 season with a maximum payout of $12.5 million.
  • Customer Attrition: Continued losses to natural gas conversions and price competition threaten volume growth.
  • Liquidity: Working capital requirements are significant during the heating season. The company relies on a $240 million revolving credit facility (expandable to $290 million) and must maintain specific fixed charge coverage ratios to pay distributions.
  • Derivative Volatility: The company does not designate derivatives as hedging instruments under GAAP, leading to earnings volatility from unrealized gains/losses on hedges.

Investor Verification Checklist

• Tax Benefit Sustainability: Verify the sustainability of the $86.4 million non-cash tax benefit from the valuation allowance release and the timeline for utilizing remaining Net Operating Losses (NOLs).
• Customer Retention: Monitor net customer attrition rates and the effectiveness of marketing initiatives to offset losses to natural gas and competitors.
• Debt Covenants: Confirm compliance with the fixed charge coverage ratio (1.15x for minimum distributions) and availability requirements under the revolving credit facility.
• Unit Repurchase Program: Track the execution of the authorized 7.5 million unit repurchase program and its impact on unitholder value.
• Weather Hedge Performance: Assess the payout status of the weather hedge contract for the 2009-2010 heating season.