Star Gas Partners, L.P. — Form 10-Q Summary
Business context and reporting period
Star Gas Partners, L.P. distributes home heating oil and propane and provides installation, repair, maintenance, home security and plumbing services to residential and commercial customers in the Northeast and Mid-Atlantic. At March 31, 2013, Petro served approximately 412,000 full-service customers, 54,600 delivery-only customers and 11,600 ancillary-service customers. The filing covers the three and six months ended March 31, 2013, the second quarter and first half of fiscal 2013. Results are highly seasonal, with the second fiscal quarter generally representing the peak heating season.
Financial performance and liquidity
| Metric | Three months ended March 31, 2013 | Year-over-year change | Six months ended March 31, 2013 | Year-over-year change |
|---|---|---|---|---|
| Total sales | $785.1 million | Up 24.7% | $1.302 billion | Up 19.3% |
| Operating income | $73.1 million | Up 0.2% | $90.5 million | Up 11.1% |
| Net income | $41.7 million | Up 3.0% | $51.4 million | Up 18.5% |
| Limited-partner income per unit | $0.58 | Up from $0.55 | $0.72 | Up from $0.59 |
| Adjusted EBITDA | $73.9 million | Up 23.8% | $103.7 million | Up 31.2% |
| Cash flow from operations | Not separately presented | Not applicable | $(141.4) million | $(105.6) million more cash used |
Reported operating margin was approximately 9.3% for the quarter and 7.0% year to date; net margin was approximately 5.3% and 4.0%, respectively. Heating oil and propane retail volume increased 26.0% in the quarter and 18.0% year to date, primarily because temperatures were 25.6% and 21.6% colder than the comparable periods. Heating oil and propane gross margin increased to $0.9542 per gallon in the quarter and $0.9533 per gallon year to date.
Operating cash flow was negative because receivables increased $208.6 million and customer credit balances declined $62.4 million. Capital expenditures were $2.1 million, and net cash used in investing activities was $2.1 million. Financing activities provided $45.9 million, including $111.5 million of revolving borrowings and $50.5 million of repayments. Cash declined from $108.1 million at September 30, 2012 to $10.6 million at March 31, 2013.
At March 31, 2013, total debt was $185.5 million, consisting of $124.4 million of 8.875% Senior Notes due 2017 and $61.0 million drawn under the revolving credit facility. The facility also had $45.0 million of letters of credit outstanding and $137.0 million of availability. The Partnership reported compliance with its fixed-charge coverage covenant and minimum availability requirements.
Material changes versus the prior comparable period
- Sales growth reflected higher product volumes, acquisitions, colder weather and higher service and installation revenue. Six-month product sales rose 19.8% to $1.187 billion, while installation and service sales rose 14.0% to $114.2 million.
- Adjusted EBITDA increased substantially despite the absence of the $12.5 million weather-hedge benefit recognized in the prior-year quarter and first half.
- Derivative fair-value accounting produced a $3.4 million credit in the quarter but a $4.5 million charge year to date, compared with credits of $17.0 million and $9.9 million, respectively, in the prior-year periods.
- Net customer attrition improved to 3,700 accounts, or 0.9%, in the first half, versus 9,100 accounts, or 2.2%, in the prior-year first half. However, customer losses to natural-gas conversion increased to 1.2% from 1.1%.
- Cash used in operations increased materially because of higher receivables associated with colder weather and increased working-capital needs. The Partnership had no acquisitions in the first half of fiscal 2013, compared with $26.2 million spent on acquisitions in the prior-year period.
- The Partnership repurchased 1.325 million common units for $5.6 million during the first half, compared with 3.9 million units for $19.6 million in the prior-year period.
Guidance, outlook, risks and unusual items
- Management estimates remaining fiscal 2013 maintenance capital expenditures of approximately $3.5 million to $4.5 million, plus approximately $0.6 million for propane operations.
- Management expects distributions during the remainder of fiscal 2013 at the current quarterly rate of $0.0825 per unit, subject to Board determination and available cash. The April 2013 distribution was declared at that rate, or $0.33 annualized.
- The Partnership expects approximately $5.5 million of scheduled Senior Note interest payments and approximately $2.0 million of additional pension contributions during the remainder of fiscal 2013.
- Liquidity is sensitive to weather, wholesale fuel prices, receivable collection, inventory and hedging collateral requirements. Management expects working capital needs to be funded by operating cash flow, cash on hand and the revolving credit facility.
- Derivative positions are not designated as accounting hedges, so mark-to-market changes can create significant earnings volatility. The Partnership also faces basis and availability risks following changes to NYMEX sulfur specifications for heating oil.
- Natural-gas conversions, customer conservation, customer credit losses, price competition, weather variability, commodity prices, counterparty credit risk, environmental and safety regulation, litigation and labor matters remain significant operating risks.
- Storm Sandy increased service, installation and motor-fuel activity but temporarily reduced certain heating-oil and propane deliveries. Management reported no material operational disruption.
- Management stated that no pending litigation was expected to have a material adverse effect. The Partnership does not carry business-interruption insurance.
Most important facts for investors to verify
- Whether seasonal receivables convert to cash during the spring and summer and reduce revolving-credit borrowings.
- Compliance with the revolving facility’s availability and fixed-charge coverage covenants, particularly after distributions and unit repurchases.
- The sustainability of approximately $0.95-per-gallon heating-oil and propane margins amid commodity-price volatility and NYMEX sulfur-specification changes.
- The effect of natural-gas conversions, customer attrition and conservation on future volumes.
- The difference between Adjusted EBITDA growth and GAAP cash generation, including working-capital requirements and capital expenditures.
- The Partnership’s ability to fund distributions, pension contributions, debt service and planned capital spending with only $10.6 million of cash at quarter-end.