Star Gas Partners, L.P. — Fiscal 2016 First Quarter 10-Q Summary
Business Context and Reporting Period
The filing is for Star Gas Partners, L.P. and subsidiaries, a retail distributor of home heating oil and propane serving approximately 458,000 full-service customers, plus approximately 78,000 delivery-only customers. The partnership also provides installation, service, home security and plumbing offerings. The report covers the three months ended December 31, 2015, the first quarter of fiscal 2016. Results are highly seasonal, with heating demand concentrated in the first and second fiscal quarters.
Key Financial Metrics
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Total sales | $319.1 million | $499.2 million | Down 36.1% |
| Operating income | $23.6 million | $30.8 million | Down 23.2% |
| Net income | $12.1 million | $15.6 million | Down 22.5% |
| Adjusted EBITDA | $35.9 million | $45.2 million | Down 20.5% |
| Income per limited partner unit | $0.19 | $0.24 | Down $0.05 |
| Cash flow from operations | $3.2 million | $(13.4) million | Improved $16.6 million |
| Cash at period end | $86.9 million | $28.1 million | Up $58.8 million |
Operating margin was approximately 7.4%, compared with 6.2% in the prior-year quarter. Net margin was approximately 3.8%, compared with 3.1%. Home heating oil and propane volume declined 25.5% to 80.1 million gallons, while other petroleum product volume increased 5.6% to 27.3 million gallons.
Home heating oil and propane gross margin increased to $1.1817 per gallon from $1.1006 per gallon. Total product gross profit nevertheless declined to $102.8 million from $125.8 million because of lower volume. Installations and services revenue increased 3.0% to $66.1 million, but combined installation and service gross profit declined to $3.2 million from $3.5 million.
Balance Sheet, Debt and Liquidity
- Total assets were $740.6 million at December 31, 2015, compared with $707.0 million at September 30, 2015.
- Total debt was $100.0 million, consisting of a senior secured term loan; no revolving credit borrowings were outstanding.
- The term loan bears interest at variable rates and had an effective rate of approximately 3.57% at December 31, 2015. It matures July 30, 2020 and requires quarterly principal payments of $2.5 million, subject to additional excess-cash-flow payments.
- The seasonal revolving facility provides commitments of $450 million from December through April, subject to borrowing-base restrictions. Availability was $184.2 million.
- Letters of credit outstanding totaled $52.4 million, and approximately $24.8 million of hedge positions were secured under the credit agreement.
- The partnership was in compliance with its fixed-charge coverage and senior secured leverage covenants.
- Cash used for investing activities was $10.8 million, including $3.2 million of capital expenditures and $7.6 million for two acquisitions. Financing cash outflows were $6.0 million, primarily distributions.
Material Changes Versus the Prior Comparable Period
- The first quarter was the warmest such period in the company’s 30-year weather history, with temperatures 32.7% warmer than normal and 27.2% warmer than the prior-year quarter. This reduced heating demand and volume.
- Net customer attrition was 1,400 accounts, or 0.3% of the customer base, compared with net customer growth of 4,300 accounts, or 1.0%, in the prior-year quarter. Management attributed the deterioration primarily to warm weather, lower fuel prices and price competition.
- Wholesale product cost declined 39.6%, or $0.9150 per gallon, contributing to lower reported product revenue but supporting higher per-gallon margins.
- Delivery and branch expenses declined 18.6% to $64.2 million, including a $12.5 million weather hedge credit.
- Interest expense declined 46.3% to $1.9 million following the September 2015 redemption of $125.0 million of 8.875% senior notes and refinancing with the $100.0 million term loan.
- The partnership completed two acquisitions for approximately $7.6 million. Management stated that their impact was not material to consolidated financial condition, results or cash flows.
Outlook, Risks and Unusual Items
No formal earnings or revenue guidance is provided. Management expects near-term liquidity needs to be funded by operating cash flow, cash on hand and, if necessary, the revolving facility. Remaining fiscal 2016 maintenance capital expenditures were estimated at approximately $6.3 million, with an additional $2.0 million planned for propane operations. At a quarterly distribution rate of $0.095 per unit, remaining fiscal 2016 distributions were estimated at approximately $16.3 million to common unitholders, plus payments to the general partner and management.
The weather hedge contract has a maximum fiscal 2016 payout of $12.5 million. The full amount was recorded as a credit at December 31, 2015, but the final credit may decline to approximately $5.2 million if January through March heating degree-days are near normal, or potentially to zero if temperatures are colder than expected. January 2016 temperatures were slightly warmer than expected.
- Weather, customer consumption, natural-gas conversions and customer attrition can materially affect volume and earnings.
- Commodity-price volatility can affect margins, working capital, derivative collateral and liquidity. Derivatives are marked to market through earnings, creating non-cash volatility.
- Variable-rate debt creates interest-rate exposure; a 100-basis-point increase was estimated to reduce annual after-tax cash flow by approximately $0.5 million.
- The partnership faces risks from fuel supply and pricing, counterparty credit, environmental and operating hazards, labor relations, litigation, regulation and acquisition integration.
- The partnership reported a remaining New England Teamsters and Trucking Industry Pension Fund withdrawal liability of approximately $17.7 million, with a stated fair value of $16.0 million.
- Management stated that no pending litigation was expected to have a material adverse effect, although insurance may not cover all potential claims.
Most Important Facts for Investors to Verify
- Whether the $12.5 million weather hedge credit is ultimately retained or reduced during the remainder of the heating season.
- Whether customer attrition and natural-gas conversions continue to pressure the customer base and future volume.
- Whether the higher $1.1817 per-gallon home heating oil and propane margin is sustainable as commodity prices and competition change.
- Compliance with debt covenants, seasonal borrowing-base availability, letters of credit and required term-loan amortization.
- Cash generation after distributions, capital expenditures, acquisitions and potential excess-cash-flow debt payments.
- The filing’s reported issuer is Star Gas Partners, L.P.; the request metadata identifies Star Group, L.P., so the legal entity and ticker should be confirmed.