Star Gas Partners, L.P. — Form 10-Q Summary
Business Context and Reporting Period
The filing is for Star Gas Partners, L.P. and subsidiaries, a Northeast and Mid-Atlantic distributor of home heating oil and propane and provider of installation, repair, maintenance, security and plumbing services. The reported period is the three months ended December 31, 2011, fiscal 2012 first quarter. The filing identifies the registrant as Star Gas Partners, L.P.; this differs from the requested company name, STAR GROUP, L.P.
At December 31, 2011, the Partnership served approximately 417,000 full-service residential and commercial customers, plus approximately 42,000 delivery-only customers and 11,500 ancillary-service customers. Results are highly seasonal, with the first and second fiscal quarters representing the peak heating season.
Financial Performance and Key Metrics
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Total sales | $461.5 million | $459.5 million | +0.4% |
| Operating income | $8.6 million | $43.7 million | -$35.1 million |
| Income before taxes | $5.6 million | $37.6 million | -$32.0 million |
| Net income | $2.9 million | $20.6 million | -$17.7 million |
| Limited partners’ interest in net income | $2.9 million | $20.5 million | -$17.5 million |
| Basic and diluted income per unit | $0.05 | $0.26 | -$0.21 |
| Adjusted EBITDA | $19.3 million | $34.3 million | -$15.0 million, or 43.7% |
| Net cash used in operating activities | $74.8 million | $88.7 million | Use improved by $13.9 million |
Product sales were essentially flat because higher selling prices offset a substantial volume decline. Retail home heating oil and propane volume fell 19.1% to 91.1 million gallons, primarily because base-business temperatures were 22.2% warmer than the prior-year period and 19.9% warmer than normal.
Home heating oil and propane gross margin increased to $0.9504 per gallon from $0.8925. However, total product gross profit declined to $90.0 million from $103.3 million because the volume reduction outweighed the margin improvement. A $7.1 million unfavorable change in the fair value of derivatives also reduced operating income, compared with a $13.9 million favorable change in the prior-year quarter.
Installation and service produced a combined profit of approximately $2.5 million, compared with $1.9 million. Delivery and branch expenses increased to $67.8 million, while expenses per gallon rose materially because fixed operating costs were spread over lower volume.
Cash Flow, Liquidity and Debt
- Cash and cash equivalents declined to $13.9 million at December 31, 2011 from $86.8 million at September 30, 2011.
- Operating cash use was $74.8 million, reflecting seasonal working-capital needs, including a $79.1 million increase in receivables and an $18.9 million increase in inventories.
- Investing cash use was $26.9 million, including $25.9 million for three acquisitions and $1.3 million of capital expenditures.
- Financing activities provided $28.8 million, including $46.8 million of revolving-facility borrowings, partially offset by $12.6 million of unit repurchases and $5.1 million of distributions.
- Total debt was $171.1 million, consisting of $124.3 million of 8.875% Senior Notes due 2017 and $46.8 million outstanding under the revolving credit facility.
- The revolving facility permits borrowings of up to $250 million, or $350 million during the heating season, subject to borrowing-base and covenant requirements. Availability was $128.1 million at December 31, 2011, and the Partnership was in compliance with its fixed-charge coverage covenant.
- The facility had $46.3 million of outstanding letters of credit. It is secured by substantially all Partnership assets and contains restrictions on distributions, acquisitions, repurchases, indebtedness and other activities.
- Management estimated remaining fiscal 2012 maintenance capital expenditures of $4.0 million to $4.5 million, additional propane investment of $1.0 million to $2.0 million, and a fiscal 2012 pension contribution of $2.7 million.
Material Changes Versus the Prior Comparable Period
- Warmer weather reduced heating oil and propane volume by 21.6 million gallons, partially offset by acquisitions and higher selling prices.
- Net customer attrition improved to 900 accounts, or 0.2% of the customer base, from 2,200 accounts, or 0.5%; propane marketing contributed approximately 700 additional net accounts.
- Adjusted EBITDA declined 43.7%, and net income declined 86%, despite improved per-gallon heating oil and propane margins.
- Derivative valuation moved from a $13.9 million gain to a $7.1 million charge, creating a $21.0 million adverse year-over-year swing.
- Interest expense declined 18.2% to $3.5 million due to lower average long-term debt and borrowing rates. The prior-year period included a $1.7 million loss on debt redemption; no comparable loss occurred in Q1 FY2012.
- The Partnership acquired three dealers for approximately $25.9 million, compared with one acquisition costing $1.6 million in the prior-year period. The acquisitions added approximately $6.2 million of goodwill and $16.1 million of intangible assets.
- The Partnership repurchased and retired 2.448 million common units for $12.6 million during the quarter. An additional 1.2 million units were repurchased for $5.6 million in January 2012.
Guidance, Outlook, Risks and Unusual Items
Management did not provide conventional earnings guidance. It stated that unusually warm weather would adversely affect fiscal 2012 liquidity, Adjusted EBITDA and net income and could impair the ability to raise capital, make distributions or repurchase units.
January 2012 temperatures were 15.6% warmer than normal and 21.5% warmer than January 2011. January heating oil and propane volume decreased 25.2% year over year. The Partnership’s weather hedge had a maximum payout of $12.5 million. Based on conditions through January 31, 2012, management estimated a potential $3.3 million payment assuming normal temperatures for the remainder of the second quarter; colder weather could reduce or eliminate the payment, while warmer weather could increase it.
The principal risks include weather volatility, wholesale fuel-price volatility, customer conservation and natural-gas conversions, customer credit risk, derivative-market and counterparty risk, covenant compliance, liquidity needs during the heating season, acquisition execution, environmental and operating hazards, labor matters and potential litigation. Management stated that no pending litigation was expected to have a material adverse effect.
The Partnership declared a quarterly distribution of $0.0775 per common unit, or $0.31 annualized, payable February 7, 2012. Management anticipated maintaining that level for the remaining three quarters of fiscal 2012, but cautioned that continued warm weather could require covenant modifications to continue distributions and unit repurchases.
Important Facts for Investors to Verify
- Verify the registrant identity because the filing is for Star Gas Partners, L.P., not Star Group, L.P.
- Assess whether subsequent weather conditions changed the expected $3.3 million weather-hedge recovery or affected covenant compliance.
- Review current borrowing-base availability, letters of credit, fixed-charge coverage and restrictions on distributions and unit repurchases.
- Evaluate the sustainability of the $0.0775 quarterly distribution given negative seasonal operating cash flow and reduced Adjusted EBITDA.
- Reconcile reported earnings with derivative valuation effects and distinguish realized product margins from non-cash mark-to-market changes.
- Review the final valuation and operating contribution of the three acquisitions completed for approximately $25.9 million.
- Monitor customer attrition, natural-gas conversions and heating oil and propane volume trends.
- Consider the Partnership’s limited cash balance, seasonal working-capital requirements, pension funding obligations and dependence on subsidiary distributions to service debt.