Business Context and Reporting Period
Star Gas Partners, L.P. is a Northeast and Mid-Atlantic distributor of home heating oil and propane and a provider of installation, maintenance, repair, plumbing, security and related services. The filing is an unaudited Form 10-Q for the three and nine months ended June 30, 2013, within the fiscal year ended September 30, 2013. The business is highly seasonal, with most heating-oil and propane volume generated during the first two fiscal quarters.
At June 30, 2013, Petro served approximately 407,000 full-service residential and commercial heating-oil and propane customers, plus approximately 53,600 delivery-only customers and 11,600 ancillary home-services customers.
Financial Performance and Key Metrics
| Metric | Three Months Ended June 30 | Change | Nine Months Ended June 30 | Change |
|---|---|---|---|---|
| Total sales | $262.5 million | Up 12.9% | $1,564.2 million | Up 18.2% |
| Operating income (loss) | $(9.7) million | Improved from $(20.1) million | $80.9 million | Up 31.7% |
| Net income (loss) | $(7.6) million | Improved from $(11.8) million | $43.8 million | Up 38.6% |
| Limited partner earnings per unit | $(0.13) | Improved from $(0.19) | $0.63 | Up from $0.46 |
| Adjusted EBITDA | $(3.4) million | Improved from $(4.2) million | $100.3 million | Up 34.0% |
| Operating cash flow | Not separately reported for the quarter | — | $(31.6) million | Down from $81.1 million |
Product sales increased to $208.9 million in the quarter and $1,396.3 million for the nine-month period. Installation and service sales increased to $53.7 million and $167.9 million, respectively. Retail home-heating-oil and propane volume increased 21.7% to 42.7 million gallons in the quarter and 18.5% to 304.2 million gallons for the nine-month period.
Reported heating-oil and propane gross margin before derivative fair-value effects increased to $0.9780 per gallon in the quarter from $0.9196 and to $0.9567 per gallon for the nine-month period from $0.9374. Service and installation generated combined profit of $9.6 million in the quarter and $15.2 million year to date.
The quarter remained seasonally loss-making. The nine-month effective income tax rate was 40.4%, unchanged from the prior-year period. The quarter included a $4.4 million tax benefit, compared with a $10.6 million benefit in the prior year.
Balance Sheet, Debt and Liquidity
| Metric | June 30, 2013 | September 30, 2012 |
|---|---|---|
| Cash and cash equivalents | $44.4 million | $108.1 million |
| Total assets | $614.1 million | $639.3 million |
| Receivables, net | $152.6 million | $88.3 million |
| Total current liabilities | $192.5 million | $228.3 million |
| Long-term debt | $124.4 million | $124.4 million |
| Partners’ capital | $276.8 million | $260.1 million |
The debt consisted primarily of $125 million of 8.875% Senior Notes due December 2017, with a carrying amount of $124.4 million. No borrowings were outstanding under the revolving credit facility at June 30, 2013, although $45.0 million of letters of credit were issued. Facility availability was $139.1 million, and the Partnership was in compliance with its fixed-charge coverage requirements.
Cash declined by $63.7 million during the nine months, primarily because of negative operating cash flow, $14.5 million of distributions and $13.9 million of unit repurchases. The cash-flow shortfall reflected a $71.9 million increase in receivables and a $52.7 million reduction in customer credit balances.
Material Changes Versus the Prior Comparable Period
- Colder weather increased heating-oil and propane volume by 21.7% in the quarter and 18.5% year to date; temperatures were 27.4% colder in the quarter and 22.3% colder year to date than in the comparable periods.
- Year-to-date results benefited from higher volumes, improved per-gallon margins, acquisitions and increased motor-fuel and service activity following Storm Sandy.
- The prior-year nine-month period included a $12.5 million weather-hedge benefit; no comparable benefit was recorded in 2013.
- Derivative fair-value charges were $1.9 million in the quarter and $6.4 million year to date, compared with $11.2 million and $1.4 million, respectively, in the prior-year periods.
- Net customer attrition improved to 10,200 accounts, or 2.5%, in the first nine months from 15,800 accounts, or 3.8%, in the comparable period. Natural-gas conversions increased to 1.7% of home-heating-oil accounts from 1.6%.
- The Partnership repurchased and retired 3.0 million common units for $13.9 million during the nine months, reducing common units outstanding to approximately 58.0 million at June 30, 2013.
Outlook, Risks and Unusual Items
No formal revenue or earnings guidance is provided. Management expected fiscal 2013 maintenance capital expenditures of approximately $1.4 million to $2.1 million for the remainder of the year, plus approximately $0.3 million for propane operations, and approximately $1.2 million of additional pension contributions.
A quarterly distribution of $0.0825 per common unit was declared in July 2013, equivalent to $0.33 per unit on an annualized basis. Management expected approximately $4.8 million to be paid to common unitholders for the distribution.
- Results and liquidity are sensitive to weather, heating demand, wholesale fuel prices, customer conservation, customer credit quality and customer attrition.
- Derivative positions are not designated as accounting hedges, so changes in fair value create earnings volatility before the related fuel transactions occur.
- Changes in NYMEX contract specifications created a mismatch between hedging contracts and the high- and ultra-low-sulfur fuel products purchased and sold, increasing hedging complexity and risk.
- The Partnership depends on distributions and intercompany interest payments from subsidiaries to service its debt; those transfers may be restricted by facility covenants.
- The revolving facility requires minimum availability or fixed-charge coverage ratios for continued borrowing, distributions, acquisitions and unit repurchases. Failure to satisfy covenants could restrict subsidiary distributions and trigger defaults.
- 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 the Partnership does not carry business-interruption insurance.
- Subsequent events included a $0.7 million August 2013 acquisition of customer lists and assets and authorization to restore the remaining Plan III repurchase capacity to 3.0 million units.
Important Facts for Investors to Verify
- Whether seasonal collections and receivables reduction restore positive operating cash flow during the remainder of fiscal 2013.
- Compliance with revolving-credit availability and fixed-charge coverage covenants after distributions, unit repurchases and seasonal working-capital needs.
- The sustainability of reported per-gallon margins amid fuel-price volatility, sulfur-specification mismatches and derivative fair-value fluctuations.
- The effect of continuing natural-gas conversions and customer attrition on heating-oil and propane volumes.
- Whether the $0.0825 quarterly distribution and additional unit repurchases remain supported by cash generation and covenant capacity.
- The potential impact of weather, customer credit losses, insurance costs, environmental claims and the absence of business-interruption insurance.