Star Gas Partners, L.P. Form 10-Q Summary
Reporting period: Three months ended December 31, 2016, representing the first quarter of fiscal 2017. The filing identifies the registrant as Star Gas Partners, L.P. and its subsidiaries. The business distributes home heating oil and propane and provides installation, service, security, plumbing and related petroleum products across the Northeast, Central and Southeast United States. It served approximately 444,000 full-service residential and commercial customers, plus approximately 75,000 delivery-only customers, at December 31, 2016.
Key Financial Metrics
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Total sales | $384.1 million | $319.1 million | Up 20.4% |
| Operating income | $33.2 million | $23.6 million | Up 40.6% |
| Income before taxes | $31.1 million | $21.5 million | Up 45.0% |
| Net income | $18.3 million | $12.1 million | Up 51.6% |
| Limited partners’ income | $18.2 million | $12.0 million | Up 51.5% |
| Basic and diluted income per unit | $0.28 | $0.19 | Up $0.09 |
| Adjusted EBITDA | $31.2 million | $35.9 million | Down 13.1% |
| Cash flow from operations | $(65.5) million | $3.2 million | Down $68.7 million |
- Retail home heating oil and propane volume increased 24.3% to 99.5 million gallons, primarily because temperatures were 33.6% colder than the prior-year period. Volume of other petroleum products increased 7.8% to 29.4 million gallons.
- Product sales rose 25.0% to $316.3 million. Product gross profit increased 13.5% to $116.7 million, but the home heating oil and propane margin declined to $1.0928 per gallon from $1.1817.
- Installation and service sales increased 2.6% to $67.8 million. Combined installation and service gross profit fell to $1.4 million from $3.2 million as service costs increased with colder weather.
- The reported derivative fair-value adjustment was an $8.6 million credit versus a $5.5 million charge in the prior-year quarter. This non-cash volatility materially affected reported operating results.
- Adjusted EBITDA declined despite higher volume because of lower per-gallon margins and the absence of the prior-year $12.5 million weather-hedge benefit.
- At December 31, 2016, cash and cash equivalents were $37.0 million, or $37.3 million including restricted cash. Total assets were $704.8 million and partners’ capital was $314.2 million.
- Total debt was $83.0 million carrying value, including $10.0 million of current maturities and $73.0 million of long-term debt. The term loan’s effective interest rate was approximately 3.91%.
- No revolving credit borrowings were outstanding. Revolver availability was $197.1 million, with $49.6 million of letters of credit outstanding. The Partnership was in compliance with its financial covenants.
Material Changes Versus the Prior Comparable Period
- Colder weather drove substantially higher sales volumes and improved first-quarter customer retention. The Partnership gained 5,200 net home heating oil and propane accounts, compared with a net loss of 1,400 accounts in Q1 FY2016.
- Wholesale product cost increased $0.1497 per gallon, while home heating oil and propane margins decreased $0.0889 per gallon. Management attributed the margin contraction partly to higher costs, customer-retention efforts and price-protected customers reaching maximum selling prices.
- Delivery and branch expenses increased 26.4% to $81.1 million; excluding the prior-year weather-hedge credit, the increase was 5.8%.
- Operating cash flow became materially negative because receivables increased $76.8 million, inventories increased $16.2 million and customer credit balances declined $22.8 million as colder weather and higher product costs increased working-capital needs.
- Investing cash use increased to $21.8 million, including $4.5 million of capital expenditures, $5.8 million of acquisition cash payments and an $11.5 million deposit into a captive-insurance trust.
- The Partnership repaid $8.7 million of term debt and paid $5.9 million of distributions. It did not repurchase common units during the quarter.
- Three acquisitions were completed for approximately $7.3 million, including $5.8 million in cash and $1.5 million of deferred liabilities.
Outlook, Risks, Contingencies and Unusual Items
- The filing provides no formal full-year earnings or revenue guidance. Management expects near-term liquidity needs to be funded through operating cash flow, cash on hand and, if necessary, the revolving credit facility.
- The business is highly seasonal: approximately 30% of annual home heating oil and propane volume is typically sold in the first fiscal quarter and 50% in the second quarter. Winter operations generally consume cash, while spring and summer operations generally generate cash.
- For the remainder of fiscal 2017, maintenance capital expenditures were estimated at $6.5 million to $7.5 million, with an additional $3.0 million planned for propane operations. Distributions at the then-current rate of $0.1025 per unit were expected to total approximately $17.2 million to common unitholders for the balance of the fiscal year.
- A quarterly distribution of $0.1025 per common unit was declared in January 2017, payable February 7, 2017.
- Weather, wholesale fuel prices, customer consumption, margin management, customer attrition, natural-gas conversions, counterparty credit, interest rates, regulation, labor matters and acquisitions remain significant risks.
- The Partnership has weather-hedge contracts for fiscal 2017 and 2018 with maximum annual payouts of $12.5 million. No weather-hedge benefit was recorded in Q1 FY2017.
- A putative class-action lawsuit alleges that customers were denied contractual benefits under protected-price plans. No class has been certified, the Partnership has moved to dismiss, and management states that it cannot assess the potential outcome or materiality.
- Future undiscounted minimum operating-lease payments through 2032 were approximately $122.5 million. The filing states that adoption of the new lease standard is expected to materially affect the balance sheet, although the discounted amounts could not yet be estimated.
- On a hypothetical 100-basis-point increase in variable interest rates, annual after-tax cash flow would decrease by approximately $0.5 million.
Investor Verification Points
- Verify whether colder weather and customer gains persist after the peak heating season and whether natural-gas conversions accelerate.
- Monitor per-gallon margins, especially for price-protected customers, and distinguish realized margins from non-cash derivative mark-to-market effects.
- Assess the timing of the seasonal recovery in receivables and inventory and whether operating cash flow supports distributions, capital spending and acquisitions.
- Review revolver availability, letters of credit, term-loan amortization and compliance with fixed-charge and leverage covenants.
- Evaluate the potential financial impact of the protected-price-plan litigation, pension and multiemployer withdrawal liabilities, insurance claims and captive-insurance collateral requirements.
- Confirm the sustainability of the $0.1025 quarterly distribution given negative winter operating cash flow and planned capital requirements.