Business Context and Reporting Period
Star Gas Partners, L.P. is a Northeast and Mid-Atlantic distributor of home heating oil, propane and other petroleum products, with installation, service, security and plumbing offerings. The filing is an unaudited Form 10-Q for the quarter and six months ended March 31, 2015, Star Gas Partners’ fiscal second quarter. The business is highly seasonal, with the second fiscal quarter representing the peak heating season.
- Approximately 452,000 full-service residential and commercial heating-oil and propane customers and approximately 76,000 delivery-only customers at March 31, 2015.
- Approximately 57.3 million common units outstanding; one reportable segment.
Key Financial Metrics
| Metric | Three months ended March 31, 2015 | Six months ended March 31, 2015 |
|---|---|---|
| Total sales | $762.3 million | $1.262 billion |
| Operating income | $134.1 million | $164.9 million |
| Net income | $75.7 million | $91.2 million |
| Limited partners’ interest in net income | $75.3 million | $90.7 million |
| Basic and diluted income per limited partner unit | $1.08 | $1.31 |
| Adjusted EBITDA | $127.7 million | $172.9 million |
| Net cash provided by operating activities | Not separately reported for the quarter | $3.6 million |
- Six-month product sales were $1.141 billion, down from $1.303 billion, while installation and service sales rose to $120.5 million from $109.5 million.
- Six-month operating margin was approximately 13.1%, compared with approximately 9.3% in the prior-year period; net margin was approximately 7.2%, compared with approximately 5.1%.
- Six-month home heating oil and propane volume increased 8.8% to 317.3 million gallons. The related gross margin increased to $1.1139 per gallon from $1.0131 per gallon.
- Cash and cash equivalents were $37.1 million at March 31, 2015, compared with $49.0 million at September 30, 2014. Receivables increased to $265.3 million from $123.8 million, primarily reflecting seasonal working-capital requirements.
- Total debt was $124.6 million, consisting principally of 8.875% Senior Notes due December 2017. No borrowings were outstanding under the revolving credit facility; availability was $232.4 million, with $55.4 million of letters of credit outstanding.
- Capital expenditures were $3.7 million for the six months, and investing cash outflow was $4.6 million. Financing cash outflow was $10.9 million, including $10.2 million of distributions and $0.7 million of unit repurchases.
Material Changes Versus the Prior Comparable Period
- Second-quarter sales declined 14.6% and six-month sales declined 10.7%, primarily because wholesale product costs fell substantially; volume and margins increased.
- Second-quarter net income increased 45.0% to $75.7 million; six-month net income increased 27.6% to $91.2 million.
- Second-quarter Adjusted EBITDA increased 24.0% to $127.7 million; six-month Adjusted EBITDA increased 24.6% to $172.9 million.
- Operating cash flow improved by $125.3 million year over year, from $121.7 million used to $3.6 million provided, largely because lower product costs reduced receivables and inventory funding needs.
- Product gross profit increased $42.8 million in the quarter and $63.7 million year to date. However, the combined installation and service business generated a $4.1 million quarterly loss and a $0.5 million six-month loss, versus a $3.0 million six-month profit in the prior year.
- Customer growth moderated: the partnership added 2,100 heating-oil and propane accounts, or 0.5%, in the first half, versus 3,100 accounts, or 0.8%, in the prior-year period. Excluding acquisitions, customer-base growth was 0.3%.
- The company acquired a propane dealer for approximately $1.1 million during fiscal 2015. The prior-year comparison includes only part of the Griffith acquisition, completed March 4, 2014, making acquisition effects material.
Outlook, Risks, Contingencies and Unusual Items
- Management cautioned that the elevated per-gallon margins achieved in the quarter and year to date may not be sustainable.
- Results and liquidity are sensitive to weather, wholesale fuel prices, customer consumption, customer attrition, natural-gas conversions, labor availability, supply conditions and counterparty credit risk.
- Colder weather increased volume but also caused higher delivery, service and labor costs; snowstorms created operational inefficiencies and premium labor expense.
- Derivative positions are economic hedges and are marked to market through earnings, creating potentially significant non-cash volatility. The six-month fair-value adjustment was a $4.3 million credit, compared with a $1.4 million credit in the prior-year period.
- The partnership had no weather-hedge benefit for the six months ended March 31, 2015. Its weather contracts can provide up to $12.5 million per fiscal year subject to specified heating-degree-day thresholds.
- At March 31, 2015, the partnership had $1.0 million of unrecognized tax benefits, a $6.1 million federal NOL carryforward subject to annual limitations, and expected future obligations including approximately $2.8 million of maintenance capital expenditures and $1.7 million of planned propane investment for the remainder of fiscal 2015.
- Management reported no litigation expected to have a material adverse effect. Controls and procedures were considered effective at a reasonable level of assurance.
- In April 2015, the partnership declared a $0.095 per-unit quarterly distribution, or $0.38 annualized, payable May 8, 2015.
- Management stated that ASU 2014-09 on revenue recognition and ASU 2015-03 on debt issuance-cost presentation were under evaluation; no material effect had yet been determined for the revenue standard.
Investor Verification Priorities
- Verify the sustainability of the unusually high heating-oil and propane margins and the contribution from colder-than-normal weather.
- Reconcile Adjusted EBITDA with operating cash flow, particularly the impact of seasonal receivables, customer credit balances and accrued taxes.
- Monitor liquidity, borrowing-base availability, letters of credit and compliance with distribution and unit-repurchase covenants.
- Assess the December 2017 maturity of the $125 million Senior Notes and the conditions governing extension or termination of the revolving credit facility.
- Evaluate customer attrition, natural-gas conversions and the shift toward price-protected plans, which may limit future margin expansion.
- Review derivative fair values, collateral requirements and exposure to fuel-price volatility.