Star Gas posts 44.5% decline in 2Q profit

STAMFORD, Conn. – The nation’s largest retail distributor of home heating oil, Star Gas Partners L.P. (NYSE: SGU), posted a profit of $41.6 million for the fiscal second quarter ended March 31, a 44.5-percent decline from the year-ago period’s $74.9 million.

The company cited “a decrease in product gross profit of $19.2 million and an unfavorable change in the fair value of derivatives of $20.3 million,” partly offset by “lower operating costs (including depreciation, amortization and net service) of $5.8 million.”

Second-quarter revenue rose 15.3 percent to $665.3 million, as the effect of higher selling prices and a wider margin were partly offset by a decline in home heating oil volume, Star said. The company’s margin per gallon on home heating oil sales “increased slightly as product costs reached new highs on 13 occasions during the second quarter of fiscal 2008,” but heating-oil sales fell 13.2 percent to 169.4 million gallons, “as the additional volume provided by acquisitions was more than offset by the effects of warmer temperatures, net customer attrition, conservation and other factors,” the company said in its report.

“Home heating oil price records were set and reset 28 times during the first and second quarters of our fiscal year,” Daniel P. Donovan, CEO of Star Gas Partners, noted in the after-market report. “We have experienced similar conditions in the past and, predictably, customers react by turning down the thermostat and seeking lower prices.

“There is always a lower price offer in the market and … we have many competitors in each of our markets, with most less than 1 percent our size,” Donovan added. “Lacking the resources to replace lost customers by acquiring other heating oil businesses, many of these smaller distributors are forced to use economically unsustainable price offers to retain or acquire new customers in times of market stress. We believe that the business retained or acquired in this way is of marginal value.

“Our preferred choice has been to fight as hard as we sensibly can through internal marketing efforts,” he said. “We intend to continue pursuing an active acquisition program as another means of obtaining new accounts.

“Reflective of the market stress described above, our list of active acquisition prospects is longer than it has ever been. We will pursue the best of these opportunities aggressively. Our strong working capital position leaves us well prepared to do so.”

Star Gas Partners L.P. (NYSE: SGU) is a provider of heating oil and related services to customers in Rhode Island, Connecticut, Maryland, Massachusetts, New York, Pennsylvania, Virginia and Washington, D.C. Additional information is available at www.star-gas.com.