Business Context and Reporting Period
Star Gas Partners, L.P. filed its Form 10-K for the fiscal year ended September 30, 2013. The Partnership distributes home heating oil and propane, sells other petroleum products, and provides heating, air-conditioning, plumbing, security, installation and repair services primarily in the Northeast and Mid-Atlantic. It served approximately 404,000 full-service residential and commercial heating customers, 54,000 delivery-only customers and 15,700 ancillary-service customers.
The business is highly seasonal: approximately 80% of annual home heating oil and propane volume is typically sold during the first and second fiscal quarters. The filing includes fourth-quarter results for the three months ended September 30, 2013, but the principal comparisons are for the full fiscal years ended September 30, 2013 and 2012.
Financial and Operating Metrics
| Metric | Fiscal 2013 | Fiscal 2012 | Change |
|---|---|---|---|
| Total sales | $1,741.8 million | $1,497.6 million | Up 16.3% |
| Operating income | $66.0 million | $58.3 million | Up 13.3% |
| Net income | $29.9 million | $26.0 million | Up 15.1% |
| Limited-partner income per unit | $0.47 | $0.40 | Up $0.07 |
| Adjusted EBITDA | $90.1 million | $66.1 million | Up 36.3% |
| Cash flow from operations | $18.5 million | $105.8 million | Down $87.3 million |
| Retail heating-oil and propane volume | 324.8 million gallons | 277.2 million gallons | Up 17.2% |
| Cash distributions declared per common unit | $0.320 | $0.310 | Up $0.010 |
Product sales increased to $1,518.7 million, while installation and service sales increased to $223.1 million. Product gross profit rose to $326.7 million from $271.3 million. Heating-oil and propane gross margin increased to $0.9536 per gallon from $0.9302 per gallon; the filing does not present a consolidated GAAP gross margin percentage.
Fiscal 2013 fourth-quarter results were seasonally weak: sales were $177.6 million, operating loss was $19.8 million, net loss was $13.9 million and loss per limited-partner unit was $0.24. The prior-year fourth quarter reported sales of $174.0 million, operating loss of $6.6 million and net loss of $5.6 million.
At September 30, 2013, cash and cash equivalents were $85.1 million, total assets were $632.5 million and partners' capital was $259.3 million. Product inventory increased to $50.2 million from $30.8 million, and total inventory increased to $68.2 million from $47.5 million.
Debt consisted principally of $125.0 million of 8.875% senior notes due December 2017, carried at $124.5 million. There were no revolving-credit borrowings at year-end, $44.7 million of letters of credit were outstanding, and borrowing availability was $164.3 million. The revolving facility permits borrowings of up to $250 million, increasing seasonally to $350 million, subject to borrowing-base and covenant limitations.
Material Changes Versus the Prior Comparable Period
- Heating-oil and propane volume increased by 47.6 million gallons, primarily because fiscal 2013 weather was 22.3% colder than fiscal 2012 and because of acquisitions. Weather remained 4.1% warmer than normal.
- Fiscal 2012 benefited from a $12.5 million weather-hedge payout; fiscal 2013 received no weather-hedge payout. Despite this comparison, Adjusted EBITDA increased substantially because of higher volume, improved margins, acquisitions, expense control and storm-related activity.
- Net customer attrition improved to 3.3%, or approximately 13,800 accounts, from 4.9%, or approximately 21,000 accounts. However, customer losses from natural-gas conversions increased to 2.4% from 2.0%.
- Fiscal 2013 included two acquisitions adding approximately 2,000 accounts for approximately $1.4 million, compared with seven acquisitions adding approximately 41,000 accounts for approximately $39.2 million in fiscal 2012.
- Operating cash flow declined sharply because of increased inventory, accounts-receivable funding needs and timing of customer receipts, despite higher earnings.
- Cash used in investing activities decreased to $7.0 million from $44.5 million, primarily because acquisition spending fell to $1.4 million from $39.2 million. Capital expenditures were approximately $6.0 million.
- The Partnership repurchased and retired 3.3 million common units for $15.2 million during fiscal 2013, compared with 4.0 million units for $19.6 million in fiscal 2012.
Guidance, Outlook, Risks and Unusual Items
Management estimated fiscal 2014 maintenance capital expenditures of approximately $5.0 million to $6.0 million, excluding leased-fleet requirements, plus approximately $1.5 million for propane operations. At the then-current quarterly distribution of $0.0825 per unit, fiscal 2014 distributions were expected to total approximately $19.0 million to common unitholders. Scheduled fiscal 2014 interest payments on the senior notes were expected to be $11.1 million.
The Partnership had supply contracts covering approximately 81% of expected fiscal 2014 heating-season home heating oil and propane requirements. Management expected to continue unit repurchases and pursue acquisitions, subject to credit-facility availability and funding constraints.
- Commodity prices, margin pass-through and hedging results remain significant risks. Derivatives are not designated as accounting hedges, so mark-to-market gains and losses flow through earnings before the related commodity is sold.
- The April 2013 change in NYMEX contract specifications from high-sulfur heating oil to ultra-low-sulfur diesel increased hedging complexity, basis risk and potential margin volatility.
- Weather is a major earnings and liquidity driver. Warm winters reduce volume and gross profit; the fiscal 2014 and 2015 weather hedge has a maximum annual payout of $12.5 million but may not fully offset adverse weather.
- The business faces ongoing customer attrition, conservation and increasing conversions to natural gas, particularly in New York, Connecticut and Pennsylvania.
- The Partnership is structurally dependent on distributions from subsidiaries to service its senior notes. The notes mature in 2017, and management stated that refinancing will likely be required.
- Distribution and repurchase capacity is subject to maintaining at least $61.3 million of availability and a 1.15 fixed-charge coverage ratio. Distributions are not guaranteed.
- The Partnership self-insures certain claims and reported approximately $51.3 million of net insurance reserves and $42.5 million of related letters of credit at September 30, 2013.
- The Partnership participates in multiemployer pension plans and estimated approximately $6.1 million of contributions to frozen defined-benefit pension obligations over the next five fiscal years. Future pension and withdrawal liabilities could be higher.
- Storm Sandy reduced heating-oil and propane deliveries in affected areas but increased diesel-fuel demand and service and installation activity. No material litigation was reported.
Important Facts for Investors to Verify
- Reconcile the strong Adjusted EBITDA increase with the much weaker $18.5 million of operating cash flow and the $87.3 million year-over-year decline in cash generated from operations.
- Review the sustainability of the $0.0825 quarterly distribution and unit-repurchase program under the revolving-credit availability and fixed-charge coverage covenants.
- Assess the 2017 refinancing requirement for the $125.0 million senior notes and the structural subordination of those notes to subsidiary liabilities.
- Monitor customer attrition, natural-gas conversions, conservation trends and the contribution from acquisitions.
- Evaluate exposure to winter weather, commodity-price changes, derivative mark-to-market volatility, basis risk and counterparty credit risk.
- Review the adequacy of insurance, environmental and pension reserves, including potential multiemployer-plan obligations.
- Consider that EBITDA and Adjusted EBITDA are non-GAAP measures and do not reflect capital expenditures, working-capital needs, taxes or debt principal payments.