Star Gas Partners, L.P. — Fiscal 2014 Second-Quarter Form 10-Q
Business context and reporting period
Star Gas Partners, L.P. is a Northeast and Mid-Atlantic distributor of home heating oil, propane, motor fuels, installation and service offerings, home security and plumbing services. The filing covers the three and six months ended March 31, 2014; fiscal year-end is September 30. Results are highly seasonal, with the first and second fiscal quarters representing the peak heating season.
At March 31, 2014, the Partnership served approximately 450,000 full-service residential and commercial heating customers, approximately 68,000 delivery-only customers and approximately 22,000 ancillary-service customers. The Partnership completed the acquisition of Griffith Energy Services, Inc. on March 4, 2014.
Key financial metrics
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Total sales | $892.2 million, up 13.6% | $1.413 billion, up 8.5% |
| Operating income | $94.0 million, up 24.9% | $130.8 million, up 39.5% |
| Net income | $52.2 million, up 25.3% | $71.5 million, up 39.0% |
| Limited partners’ income per unit | $0.75 versus $0.58 | $1.03 versus $0.72 |
| Adjusted EBITDA | $103.0 million, up 35.3% | $138.8 million, up 29.7% |
| Net cash used in operating activities | Not separately provided | $121.7 million used, versus $141.4 million used |
Six-month product sales were $1.303 billion, compared with $1.187 billion. Product gross profit increased to $305.2 million from $259.0 million. Home heating oil and propane margin increased to $1.0131 per gallon from $0.9533 per gallon; management cautioned that the higher margin may not be sustainable.
The six-month effective income tax rate was 41.5%, compared with 39.8% in the prior year. Interest expense, net increased to $7.9 million from $7.4 million.
Balance sheet, debt and liquidity
| Balance-sheet item | March 31, 2014 | September 30, 2013 |
|---|---|---|
| Cash and cash equivalents | $13.0 million | $85.1 million |
| Accounts receivable | $377.8 million | $96.1 million |
| Total assets | $884.3 million | $632.5 million |
| Revolving credit borrowings | $165.7 million | None |
| Long-term debt | $124.5 million | $124.5 million |
| Total debt | $290.3 million | $124.5 million |
| Partners’ capital | $320.5 million | $259.3 million |
The January 2014 amended 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. At March 31, $55.0 million of letters of credit were outstanding and availability was $97.1 million. The Partnership was in compliance with its fixed-charge coverage covenant.
The Partnership’s $125 million 8.875% Senior Notes mature in December 2017. The revolving facility generally matures in June 2017, with potential extension to January 2019 if specified conditions are met. Six-month investing cash outflows included $98.0 million for acquisitions and $5.0 million of capital expenditures. Financing activities provided $152.4 million, primarily from revolving-facility borrowings.
Material changes versus the prior comparable period
- Heating oil and propane volume increased 14.3% in the quarter and 11.5% for the six-month period, primarily because temperatures were 14.6% and 11.1% colder, respectively, than in the prior comparable periods.
- Net customer gains were 3,300 in the first six months, compared with net attrition of 3,700 in the prior year. Management attributed the improvement partly to the colder winter.
- Installation and service sales declined 4.1% for the six-month period, reflecting the prior year’s favorable impact from Storm Sandy-related repairs and installations.
- The Griffith acquisition added approximately 50,000 accounts. It contributed $29.6 million of sales and $1.6 million of pretax earnings from the acquisition date through March 31, 2014. Purchase consideration was $98.7 million, with preliminary goodwill of $3.1 million and $49.2 million of acquired customer-list, trade-name and other intangible assets.
- Cash declined by $72.1 million during the six months, while revolving-credit borrowings increased by $165.7 million to fund seasonal working capital and the acquisition.
- Common units outstanding declined to 57.5 million from 59.8 million weighted-average units in the prior-year six-month period; 250,000 units were repurchased and retired during the first half of fiscal 2014.
Outlook, risks and unusual items
- Management expects maintenance capital expenditures of approximately $4.0 million to $4.5 million for the remainder of fiscal 2014, plus approximately $1.3 million for propane operations.
- The Partnership declared a quarterly distribution of $0.0875 per unit, or $0.35 annualized, payable May 9, 2014. Remaining fiscal 2014 distributions at that rate were estimated at approximately $10.1 million to common unitholders.
- Management expects approximately $5.5 million of scheduled Senior Note interest payments and approximately $1.1 million of additional pension contributions for the balance of fiscal 2014.
- Liquidity is exposed to seasonal working-capital requirements, wholesale fuel-price volatility, customer credit, weather, hedging collateral requirements and the ability to pass higher product costs to customers.
- The Partnership does not designate commodity derivatives as accounting hedges, so changes in their fair value create earnings volatility. The six-month period included a $1.4 million derivative fair-value credit; the quarter included a $4.1 million charge.
- Natural-gas conversions remain a customer-retention risk. The Partnership lost 1.2% of home heating oil accounts to natural gas during the first six months, and management expects conversions may continue to increase.
- New ultra-low-sulfur heating-oil requirements taking effect in additional states beginning July 1, 2014 may increase hedging complexity, costs and margin risk.
- 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 potential claims and the Partnership carries no business-interruption insurance.
- Disclosure controls were deemed effective as of March 31, 2014. Integration of Griffith may require additions or changes to internal controls.
Important facts for investors to verify
- Whether unusually cold weather and elevated per-gallon margins can be repeated after the peak heating season.
- The final post-closing working-capital adjustment and the eventual contribution and synergies from Griffith.
- Revolving-facility availability, borrowing-base capacity, letters of credit and compliance with fixed-charge coverage and distribution covenants.
- Cash conversion, particularly the large seasonal increase in receivables and continued reliance on revolver borrowings.
- Customer attrition, natural-gas conversions and the sustainability of recent customer gains.
- The effect of ultra-low-sulfur fuel regulations and commodity-derivative mark-to-market volatility on future margins and earnings.
- The tax consequences of the Partnership’s ongoing evaluation of possible elections to be taxed as an association or corporation, including effects on unitholders.