Star Gas Partners, L.P. — Fiscal 2012 Form 10-K Summary
Reporting period: Fiscal year ended September 30, 2012, with selected quarterly data through September 30, 2012. The source filing identifies the registrant as Star Gas Partners, L.P.; the request metadata names “STAR GROUP, L.P.”
Business context
Star Gas Partners distributes home heating oil and propane and provides heating, air-conditioning, plumbing, security and related services across the Northeast and Mid-Atlantic. At September 30, 2012, it served approximately 416,000 full-service home heating oil and propane customers, 48,000 delivery-only customers and 11,500 ancillary-service customers. Product sales represented approximately 86% of fiscal 2012 revenue, with installations and services representing approximately 14%.
The business is highly seasonal: approximately 80% of home heating oil and propane volume is sold during the October–March heating season. Fiscal 2012 was materially affected by unusually warm weather.
Financial results and key metrics
| Metric | Fiscal 2012 | Fiscal 2011 | Change |
|---|---|---|---|
| Sales | $1,497.6 million | $1,591.3 million | Down 5.9% |
| Operating income | $53.9 million | $62.0 million | Down 13.2% |
| Net income | $26.0 million | $24.3 million | Up 6.8% |
| Net income per limited partner unit | $0.40 | $0.35 | Up $0.05 |
| Adjusted EBITDA | $61.7 million | $82.5 million | Down 25.2% |
| Cash flow from operations | $105.8 million | $39.4 million | Up $66.4 million |
| Capital expenditures | $5.8 million | $6.4 million | Down $0.6 million |
| Retail home heating oil and propane volume | 277.2 million gallons | 355.6 million gallons | Down 22.0% |
Product gross profit declined to $271.4 million from $335.1 million, principally because lower volume more than offset improved home heating oil and propane margins. Home heating oil and propane margin increased to $0.9302 per gallon from $0.9122. Installation and service profit improved to $26.5 million from $18.9 million.
Reported derivative fair-value accounting produced an $8.5 million credit in fiscal 2012 versus a $2.6 million charge in fiscal 2011. The Partnership does not designate these derivatives as hedges for accounting purposes, creating earnings volatility from mark-to-market changes.
Fourth-quarter results
| Three months ended September 30 | 2012 | 2011 |
|---|---|---|
| Sales | $174.0 million | $153.2 million |
| Operating income (loss) | $(7.5) million | $(41.3) million |
| Net income (loss) | $(5.6) million | $(26.7) million |
| Net income (loss) per limited partner unit | $(0.09) | $(0.40) |
The fourth quarter remained loss-making, consistent with the Partnership’s seasonal pattern, but results improved substantially from the prior-year quarter.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $108.1 million at September 30, 2012, compared with $86.8 million a year earlier.
- Long-term debt was $124.4 million, consisting primarily of $125.0 million face value of 8.875% Senior Notes due December 2017.
- No borrowings were outstanding under the revolving credit facility; $42.8 million of letters of credit were outstanding and availability was $179.2 million.
- The revolving facility provides borrowing capacity of up to $250 million, increasing to $350 million during the heating season, subject to borrowing-base and covenant requirements.
- Fiscal 2012 financing uses included $19.5 million of distributions and $19.6 million for repurchase and retirement of approximately 4.0 million common units.
- The Partnership declared fiscal 2012 distributions of $0.310 per common unit and declared a fourth-quarter distribution of $0.0775 per unit, or $0.31 annualized.
- Total contractual obligations were $271.3 million, including $125.0 million of senior notes, $54.7 million of operating leases, $29.9 million of purchase obligations and $58.1 million of interest obligations.
Material changes versus fiscal 2011
- Heating oil and propane volume fell 22.0%, driven primarily by weather that was 21.4% warmer than fiscal 2011 and 21.7% warmer than normal, plus customer attrition.
- Net customer attrition increased to 4.9% from 3.5%; gross customer losses increased to 18.3% from 16.7%. Natural-gas conversions accounted for 2.0% of customer losses versus 1.5% in fiscal 2011.
- Seven acquisitions added approximately 41,000 accounts for an aggregate cost of approximately $39.2 million.
- Adjusted EBITDA declined by $20.8 million, despite a $12.5 million weather-hedge recovery, expense controls, acquisitions and improved per-gallon margins.
- Operating cash flow increased sharply because lower sales volume reduced working-capital requirements, including receivables and inventory funding.
- The Partnership completed its prior 7.25 million-unit repurchase authorization and began a new authorization to repurchase up to 3.0 million units.
- The fixed-charge coverage ratio was 1.14 for the twelve months ended March 31, 2012, below the 1.15 threshold for distributions. A facility amendment temporarily permitted distributions through December 31, 2012, subject to availability and per-unit distribution limits. The ratio exceeded 1.15 for the year ended September 30, 2012.
Guidance, outlook, risks and unusual items
- Management estimated fiscal 2013 maintenance capital expenditures of approximately $4.0 million to $5.0 million, excluding leased fleet requirements, plus approximately $1.3 million for propane operations.
- Management anticipated maintaining the $0.0775 quarterly distribution during fiscal 2013, subject to cash generation and debt-facility covenants.
- Fiscal 2013 scheduled senior-note interest was estimated at $11.1 million. Expected pension contributions were approximately $3.6 million in fiscal 2013 and approximately $14.8 million over the following five fiscal years.
- The Partnership entered into weather hedge contracts for fiscal 2013, 2014 and 2015, each with a maximum payout of $12.5 million, but stated that such contracts may not fully offset warm-weather effects.
- New York’s ultra-low-sulfur heating-oil mandate increased product costs and created a temporary mismatch between physical fuel specifications and NYMEX hedge contracts, increasing hedging complexity and basis risk.
- Storm Sandy occurred on October 29, 2012. The filing reported temporary terminal closures and lower heating-oil and propane deliveries for customers without power, partly offset by higher diesel, service and installation activity. The full financial impact had not yet been determined.
- Key ongoing risks include warm winters, natural-gas conversions, customer attrition, commodity-price volatility, inability to pass through cost increases, derivative and counterparty risk, seasonal liquidity needs, acquisition execution, environmental liabilities, insurance reserves, union relations and multiemployer pension obligations.
- The Partnership reported approximately $44.2 million of insurance reserves and participates in multiemployer pension plans whose future costs could increase. No material litigation was reported, and management stated that known environmental matters were not expected to have a material impact.
- Goodwill was $201.1 million and other intangible assets were $74.7 million at year-end. The annual goodwill impairment test indicated no impairment, but the conclusion depends on projected cash flows, discount rates and valuation multiples.
Important facts for investors to verify
- Whether customer attrition and natural-gas conversions continue to rise and whether acquisitions offset underlying customer and volume losses.
- Fiscal 2013 heating-season weather, delivered volume and the extent to which per-gallon margins remain sustainable.
- Compliance with the revolving-credit-facility availability and fixed-charge-coverage requirements governing distributions and unit repurchases.
- The Partnership’s ability to refinance or repay the $125.0 million of senior notes due in 2017.
- The cash impact of commodity-price movements, hedge collateral requirements and the New York ultra-low-sulfur fuel specification mismatch.
- The eventual operating and financial effects of Storm Sandy and any subsequent environmental, insurance or terminal-related claims.
- Future funding requirements for frozen defined-benefit and multiemployer pension plans and the adequacy of insurance reserves.
- The sustainability of distributions, which are not guaranteed and remain subject to operating performance, reserves and debt covenants.