Star Gas Partners, L.P. — Form 10-Q Summary
Business context and reporting period
Star Gas Partners, L.P. is a Northeast and Mid-Atlantic distributor of home heating oil, propane, diesel, gasoline and related installation, service, security and plumbing offerings. At June 30, 2014, it served approximately 444,000 full-service residential and commercial heating customers, approximately 66,000 delivery-only customers and approximately 22,000 ancillary-service customers.
This unaudited Form 10-Q covers the three and nine months ended June 30, 2014, the third quarter and first nine months of fiscal 2014. Results are highly seasonal, with losses generally expected in the quarters ending June and September.
Financial performance and key metrics
| Metric | Three months ended June 30, 2014 | Three months ended June 30, 2013 | Nine months ended June 30, 2014 | Nine months ended June 30, 2013 |
|---|---|---|---|---|
| Total sales | $326.5 million | $262.5 million | $1,739.4 million | $1,564.2 million |
| Operating income (loss) | $(10.8) million | $(8.0) million | $120.0 million | $85.8 million |
| Net income (loss) | $(9.6) million | $(7.6) million | $61.9 million | $43.8 million |
| Limited partners’ income (loss) | $(9.5) million | $(7.5) million | $61.6 million | $43.6 million |
| Basic and diluted income (loss) per unit | $(0.17) | $(0.13) | $0.91 | $0.63 |
| Adjusted EBITDA | $(8.3) million | $(1.8) million | $130.4 million | $105.2 million |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $5.3 million | $(31.6) million |
Nine-month home heating oil and propane volume increased 11.4% to 338.7 million gallons, primarily because of colder weather and the Griffith acquisition. The corresponding realized gross margin increased to $1.0044 per gallon from $0.9567 per gallon. Third-quarter volume increased 10.4% to 47.1 million gallons, while the margin declined to $0.9507 per gallon from $0.9780 per gallon.
Nine-month total product gross profit increased to $357.1 million from $304.4 million. Service and installation gross profit declined to $11.8 million from $15.2 million. The filing does not provide a consolidated GAAP gross margin percentage.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $7.1 million at June 30, 2014, compared with $85.1 million at September 30, 2013.
- Receivables increased to $211.1 million from $96.1 million; inventories declined to $48.6 million from $68.2 million.
- Total assets were $695.1 million, compared with $632.5 million at September 30, 2013.
- Total debt was $164.1 million, consisting of $124.5 million of 8.875% Senior Notes due December 2017 and $39.5 million drawn under the revolving credit facility.
- The asset-based revolving facility permits borrowings of up to $300 million, or $450 million during the December-April heating season, subject to borrowing-base and covenant requirements. Availability at June 30, 2014 was $120.9 million, with $52.5 million of letters of credit outstanding.
- The Partnership was in compliance with its fixed-charge coverage covenant at June 30, 2014. The credit facility matures in June 2017, or potentially January 2019 if specified conditions are satisfied.
- Nine-month investing cash use was $104.3 million, principally reflecting the $98.7 million Griffith acquisition. Financing activities provided $21.1 million, including net revolving-credit borrowings of $39.5 million.
Material changes versus the prior comparable period
- Sales increased 24.4% for the quarter and 11.2% year to date, driven by higher product volume, colder weather and the Griffith acquisition.
- Quarterly net loss increased by $2.0 million, and quarterly Adjusted EBITDA loss increased by $6.6 million, despite higher sales. Factors included lower heating-oil and propane margins, higher bad-debt expense, propane expansion costs, prior-period adjustments and a $0.8 million Adjusted EBITDA loss at Griffith.
- Nine-month net income increased $18.1 million and Adjusted EBITDA increased $25.2 million, primarily because of higher volume, stronger heating-oil and propane margins and acquisition contributions.
- Operating cash flow improved by $36.9 million from the prior-year period, changing from a $31.6 million use to a $5.3 million source, but cash declined substantially because of the acquisition and distributions.
- Customer attrition improved: the first nine months produced net attrition of 2,900 accounts versus 10,200 accounts in the prior-year period. Natural-gas conversions represented 1.6% of the heating-oil customer base versus 1.7% previously.
Acquisition, unusual items and controls
- On March 4, 2014, the Partnership acquired Griffith Energy Services for $98.7 million, including $4.2 million of cash acquired, and issued $8.5 million of letters of credit. Griffith added approximately 50,000 accounts and contributed $86.9 million of sales and $0.4 million of pretax earnings from acquisition through June 30.
- The Partnership recorded a $2.2 million after-tax reduction to third-quarter net income, or $3.7 million before the related tax benefit, to correct errors relating to prior-period state sales and petroleum taxes, related interest and penalties, and installations and service sales. Management stated that the errors were not material to previously issued financial statements or to nine-month results.
- The correction included third-quarter increases of $1.7 million in delivery and branch expenses, $1.4 million in interest expense and a $0.6 million reduction in installations and service sales, partially offset by a $1.5 million tax benefit.
- Management identified a material weakness in internal control over financial reporting involving tax assessment controls, management reporting and reconciliations for installations and service sales and accounts receivable. Disclosure controls were therefore ineffective as of June 30, 2014. Remediation efforts were initiated in the fourth quarter.
- The Partnership declared a quarterly distribution of $0.0875 per unit, or $0.35 annualized, payable August 8, 2014.
Outlook, risks and contingencies
- Management expects remaining fiscal 2014 maintenance capital expenditures of approximately $1.5 million to $2.0 million, plus approximately $1.0 million for propane operations, and approximately $0.6 million of pension contributions.
- Future liquidity depends on operating cash flow, cash on hand, seasonal working-capital reductions and availability under the revolving facility. The filing provides no formal revenue or earnings guidance.
- Results are sensitive to weather, wholesale fuel prices, customer consumption, price-protected hedging volumes, margin sustainability, customer creditworthiness, natural-gas conversions and customer attrition.
- Derivative instruments are not designated as accounting hedges, so changes in fair value create potentially significant non-cash earnings volatility. At June 30, 2014, the filing reported $1.1 million of net derivative assets on the balance sheet after offsetting.
- The Partnership is exposed to variable-rate debt; a 100-basis-point increase in applicable rates would reduce future after-tax cash flow by approximately $0.2 million, based on the filing’s sensitivity analysis.
- Operations involve hazardous liquids and related environmental, personal-injury and property-damage risks. Management reported no litigation expected to have a material adverse effect, but insurance may not cover all future claims and the Partnership does not carry business-interruption insurance.
- The Partnership is evaluating adoption of ASU 2014-09, Revenue from Contracts with Customers, effective for its fiscal 2018 annual reporting period; the impact had not been determined.
Important facts for investors to verify
- Progress and effectiveness of remediation for the disclosed material weakness in internal controls.
- Cash generation, receivables collections and borrowing-base availability after the Griffith acquisition and through the next heating season.
- Whether the elevated nine-month heating-oil and propane margin of $1.0044 per gallon is sustainable.
- Integration performance, profitability and working-capital needs of Griffith, including its contribution to future Adjusted EBITDA.
- Compliance with revolving-credit covenants and the ability to fund distributions, capital expenditures, pension obligations and the 2017 Senior Notes maturity.
- Effects of weather, fuel-price volatility, derivative mark-to-market movements, customer attrition and natural-gas conversions on future results.