Star Gas Partners, L.P. — Form 10-Q Summary
Reporting period: Quarter and six months ended March 31, 2012; fiscal year ending September 30, 2012. The filing identifies the registrant as Star Gas Partners, L.P., although the request metadata states Star Group, L.P.
Business Context
Star Gas Partners is a Northeast and Mid-Atlantic distributor of home heating oil and propane and provider of installation, repair, maintenance, home security, and plumbing services. At March 31, 2012, it served approximately 410,000 full-service residential and commercial customers, 41,000 delivery-only customers, and 11,500 ancillary-services customers.
Results are highly seasonal, with the second fiscal quarter representing the peak heating period. The six months ended March 31, 2012 were the warmest in the company’s 30-year operating history and the warmest winter in 112 years in the New York City metropolitan area.
Key Financial Metrics
| Metric | Three months ended March 31, 2012 | Three months ended March 31, 2011 | Six months ended March 31, 2012 | Six months ended March 31, 2011 |
|---|---|---|---|---|
| Total sales | $629.6 million | $731.9 million | $1,091.1 million | $1,191.4 million |
| Operating income | $72.9 million | $88.0 million | $81.5 million | $131.6 million |
| Net income | $40.5 million | $48.7 million | $43.4 million | $69.2 million |
| Limited partner income per unit | $0.55 | $0.61 | $0.59 | $0.86 |
| Adjusted EBITDA | $59.7 million | $79.4 million | $79.1 million | $113.7 million |
| Net cash used in operating activities | Not separately reported | Not separately reported | $(35.8) million | $(102.7) million |
Margins: Net margin was approximately 6.4% for the quarter and 4.0% year to date, compared with approximately 6.7% and 5.8%, respectively, in the prior-year periods. Home heating oil and propane gross margin improved to $0.9331 per gallon in the quarter and $0.9402 per gallon year to date, from $0.9177 and $0.9080, respectively.
Liquidity and debt: Cash and cash equivalents were $25.1 million at March 31, 2012, compared with $86.8 million at September 30, 2011. Total debt was $156.7 million, consisting of $124.3 million of 8.875% senior notes due 2017 and $32.4 million drawn under the revolving credit facility. Availability under the facility was $152.0 million, with $46.9 million of letters of credit outstanding.
Balance sheet: Total assets were $645.5 million and partners’ capital was $287.4 million at March 31, 2012. Receivables increased to $204.9 million from $93.0 million at September 30, 2011, while inventories declined to $45.3 million from $80.5 million.
Material Changes Versus the Prior Comparable Period
- Quarterly home heating oil and propane volume declined 27.1% to 130.5 million gallons; six-month volume declined 24.0% to 221.6 million gallons. Management attributed most of the reduction to unusually warm weather, customer attrition, and lower consumption related to high fuel prices.
- Quarterly sales declined 14.0% and six-month sales declined 8.4%, despite higher selling prices. Product sales declined 14.9% for the quarter and 9.2% year to date.
- Quarterly net income declined 16.8%, while six-month net income declined 37.3%. Adjusted EBITDA declined 24.8% for the quarter and 30.5% year to date.
- Delivery and branch expenses decreased in absolute dollars but increased substantially on a per-gallon basis because fixed operating costs could not be reduced in line with volume. The six-month expense rate, excluding the weather hedge recovery, increased to $0.6407 per gallon from $0.5073.
- The company recorded the maximum $12.5 million recovery under its fiscal 2012 weather hedge, which was collected in April 2012. The recovery reduced delivery and branch expenses.
- The company acquired four heating oil and propane dealers for approximately $26.2 million during the six months, including $6.2 million of goodwill. It subsequently acquired another dealership’s customer lists and assets for approximately $12.2 million in April 2012.
- The company completed its authorized repurchase of 7.25 million common units by February 2012 at an average price of $4.94 per unit. No additional repurchase authorization had been granted.
- Cash used in operating activities improved year over year primarily because the lower sales volume reduced working-capital requirements, particularly receivables and inventory.
Guidance, Outlook, Risks, and Unusual Items
- Management expected to pay distributions of $0.0775 per unit in each of the final two fiscal 2012 quarters, subject to the amended credit facility terms. On April 19, 2012, it declared a $0.0775 distribution payable May 8, 2012.
- Because the trailing twelve-month fixed charge coverage ratio was 1.14, below the 1.15 threshold for distributions and unit repurchases, the company amended its revolving credit facility in April 2012. Through December 31, 2012, distributions are permitted if availability exceeds $50.0 million and distributions do not exceed $0.2325 per common unit.
- After December 31, 2012, distributions generally require availability of at least $61.3 million and a 1.15 fixed charge coverage ratio. Covenant compliance is therefore a key liquidity consideration.
- Management expected approximately $2.0–$2.5 million of maintenance capital expenditures, $1.0–$1.5 million for propane fleet and tank investments, and an additional $2.0 million pension contribution for the remainder of fiscal 2012.
- Major risks include weather volatility, high wholesale fuel prices, customer attrition and conversion to natural gas, commodity and derivative-market volatility, counterparty and customer credit risk, environmental and operating hazards, pension funding requirements, and restrictions under the revolving credit facility.
- Derivative instruments are not designated as accounting hedges; changes in fair value therefore create earnings volatility. At March 31, 2012, derivative assets totaled $15.0 million and derivative liabilities totaled $10.3 million.
- The company reported no litigation expected by management to have a material adverse effect. Disclosure controls were deemed effective, and no material change in internal control over financial reporting was reported.
Investor Verification Checklist
- Verify the sustainability of operating results after the unusually warm 2012 heating season and the extent of any volume recovery.
- Monitor revolving-credit availability, fixed charge coverage, borrowing-base calculations, and compliance with distribution covenants.
- Reconcile reported Adjusted EBITDA with GAAP cash flow, particularly because Adjusted EBITDA excludes working-capital needs, taxes, interest, and capital expenditures.
- Assess customer attrition, natural-gas conversions, fuel-price sensitivity, and per-gallon delivery costs.
- Review the valuation and integration of acquisitions, including preliminary goodwill and intangible-asset allocations.
- Evaluate pension contributions, uncertain tax benefits, derivative exposures, and the company’s ability to fund distributions and scheduled debt service.