Business Context and Reporting Period
Star Gas Partners, L.P. and subsidiaries is a Northeast and Mid-Atlantic distributor of home heating oil, propane and other fuels, with installation, repair, maintenance and ancillary home services. Petro served approximately 419,000 full-service customers and approximately 48,000 delivery-only customers at June 30, 2012. The unaudited Form 10-Q covers the three and nine months ended June 30, 2012, the third quarter of fiscal 2012, with comparisons to the same periods in fiscal 2011.
The business is highly seasonal: the first two fiscal quarters generally generate most heating-oil and propane volume and income, while the quarters ending June and September generally produce net losses. The filing identifies the registrant as Star Gas Partners, L.P.; the request metadata refers to Star Group, L.P.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Nine Months Ended June 30 |
|---|---|---|
| Total sales | $232.5 million, down from $246.8 million | $1.324 billion, down from $1.438 billion |
| Operating income (loss) | $(20.1) million, compared with $(28.3) million | $61.4 million, compared with $103.3 million |
| Net income (loss) | $(11.8) million, or $(0.19) per unit | $31.6 million, or $0.46 per unit |
| Adjusted EBITDA | $(4.2) million, compared with $(7.5) million | $74.8 million, down from $106.2 million |
| Cash flow from operating activities | Not separately presented in the financial statements; MD&A reports $116.9 million for the quarter | $81.1 million, compared with $(19.1) million |
| Capital expenditures | Not separately presented | $3.5 million, compared with $3.8 million |
| Acquisitions | Not separately presented | $38.3 million, compared with $6.3 million |
Product sales declined primarily because heating-oil and propane volume fell 23.6% year to date to 256.7 million gallons. Installation and service sales increased 1.8% year to date to $150.9 million. Reported product gross profit decreased to $250.7 million from $314.7 million year to date, despite an increase in heating-oil and propane margin to $0.9374 per gallon from $0.9125.
As of June 30, 2012, cash and cash equivalents were $91.2 million, compared with $86.8 million at September 30, 2011. Total assets were $616.9 million and partners’ capital was $271.2 million. Long-term debt was $124.3 million, consisting principally of 8.875% senior notes due 2017. No revolving-credit borrowings were outstanding; $46.9 million of letters of credit were issued, and borrowing availability was $154.0 million.
Material Changes Versus the Prior Comparable Period
- Third-quarter sales decreased 5.8%, while nine-month sales decreased 8.0%, reflecting substantially lower heating-oil and propane volume.
- Third-quarter net loss improved by $6.4 million, primarily because lower delivery and branch expenses, lower general and administrative expenses, improved service and installation profitability, and a smaller derivative-related charge more than offset lower product gross profit.
- Nine-month net income declined $19.4 million, and Adjusted EBITDA declined $31.4 million, principally because the heating season was unusually warm, customer attrition increased, and heating-oil and propane volume declined.
- Heating-oil and propane volume declined 20.8% in the third quarter and 23.6% year to date. Management attributed the decline to warmer weather, customer attrition, conservation and other factors.
- Net customer attrition for the first nine months was 15,800 accounts, compared with 14,800 in the prior-year period. Natural-gas conversions represented 1.6% of home-heating-oil accounts, compared with 1.0% a year earlier.
- Operating cash flow improved materially to $81.1 million year to date from a $19.1 million use, aided by lower receivables and inventories and favorable working-capital timing, notwithstanding weaker operating results.
- The Partnership completed five acquisitions for approximately $38.3 million, compared with three acquisitions costing $6.3 million in the prior-year period. Approximately $31.2 million of the 2012 purchase price was allocated to intangible assets.
- The Partnership completed a 7.25 million-unit repurchase program by February 2012, retiring the units at an average price of $4.94 per unit and spending approximately $19.6 million during the nine-month period.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal earnings or revenue guidance. Management expects remaining fiscal 2012 maintenance capital expenditures of approximately $0.5 million to $1.0 million, plus approximately $0.5 million for propane fleet and tank purchases. Management anticipated a quarterly distribution of $0.0775 per unit for the final fiscal quarter, subject to applicable credit-facility conditions.
- Fiscal 2012 heating conditions were exceptionally warm; the October 2011 through March 2012 heating season was described as the warmest in the company’s 30-year history, and the New York City metropolitan area experienced its warmest heating season in 112 years. A weather hedge generated the maximum $12.5 million recovery for the 2012 heating season.
- Because the fixed-charge coverage ratio was 1.14 for the twelve months ended March 31, 2012, below the 1.15 threshold for distributions, the Partnership amended its revolving facility. Through December 31, 2012, distributions are permitted if availability exceeds $50.0 million and distributions do not exceed $0.2325 per common unit. At June 30, 2012, the Partnership reported availability of $154.0 million and compliance with applicable covenants.
- After December 31, 2012, distributions generally require availability of at least $61.3 million and a fixed-charge coverage ratio of at least 1.15. Failure to satisfy covenants could restrict distributions, acquisitions, repurchases and access to liquidity.
- New York’s ultra-low-sulfur heating-oil mandate became effective July 1, 2012. The filing reported an incremental cost of approximately 8 to 14.5 cents per gallon during July. The mismatch between the mandated fuel and NYMEX contract specifications through April 2013, and the subsequent specification changes, may increase hedging complexity, costs and earnings volatility.
- Derivative instruments are not designated as accounting hedges; changes in fair value flow through earnings before the underlying commodity is sold. The third-quarter derivative charge was $11.2 million, compared with a $16.3 million charge in the prior-year quarter.
- Approximately 74% of price-protected customers were subject to annual renewal between April and November. Nonrenewals could adversely affect near-term profitability, liquidity and cash flow.
- At June 30, 2012, derivative fair-value assets totaled $25.6 million and liabilities totaled $32.2 million. A hypothetical 10% increase in product cost would have increased derivative fair value by $6.2 million, while a 10% decrease would have reduced it by $4.5 million.
- Management reported no litigation expected to have a material adverse effect, but the business remains exposed to environmental, transportation, product-handling, insurance, customer-credit, counterparty, regulatory and weather risks.
Subsequent to quarter-end, the Partnership authorized a new program to repurchase up to 3.0 million common units, declared the $0.0775-per-unit distribution, entered into weather hedges covering fiscal years 2013 through 2015 with maximum annual payouts of $12.5 million, and amended its management incentive compensation plan.
Important Facts for Investors to Verify
- Assess whether the reported improvement in operating cash flow is sustainable or primarily reflects seasonal working-capital releases and unusually low year-end inventory and receivables.
- Verify compliance with the revolving-credit facility’s availability and fixed-charge coverage requirements, particularly after the temporary distribution amendment expires on December 31, 2012.
- Monitor heating-oil and propane volume, customer attrition, price-protected customer renewals and natural-gas conversions.
- Evaluate the impact of ultra-low-sulfur fuel requirements and related NYMEX hedging mismatches on margins, collateral requirements and derivative volatility.
- Review acquisition valuations, the significant increase in intangible assets, and the sensitivity of goodwill and customer-list valuations to operating performance.
- Distinguish GAAP results from management’s non-GAAP Adjusted EBITDA and consider that Adjusted EBITDA excludes working-capital needs, capital expenditures, taxes and debt service.
- Confirm the terms, funding capacity and actual activity under the newly authorized 3.0 million-unit repurchase plan.