Business Context and Reporting Period
Star Gas Partners, L.P. is a Northeast and Mid-Atlantic distributor of home heating oil and propane, with related installation, maintenance, heating and air-conditioning, security, plumbing, and delivery-only fuel services. The partnership served approximately 448,000 full-service customers, 73,000 delivery-only customers, and 23,000 ancillary-service customers at December 31, 2014. The filing covers the fiscal first quarter ended December 31, 2014, compared with the quarter ended December 31, 2013. Results are highly seasonal, with the first and second fiscal quarters representing the primary heating season.
Key Financial Metrics
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Total sales | $499.2 million | $520.6 million | Down 4.1% |
| Operating income | $30.8 million | $36.9 million | Down 16.6% |
| Income before taxes | $26.9 million | $32.8 million | Down 18.1% |
| Net income | $15.6 million | $19.3 million | Down 19.4% |
| Limited partner income per unit | $0.24 | $0.29 | Down $0.05 |
| Adjusted EBITDA | $45.2 million | $35.8 million | Up 26.4% |
| Net cash used in operating activities | $13.4 million | $93.1 million | Improved by $79.7 million |
| Capital expenditures | $1.8 million | $3.0 million | Down $1.2 million |
Reported net margin was approximately 3.1% versus 3.7% in the prior-year quarter; operating margin was approximately 6.2% versus 7.1%. Product sales declined 6.1% to $435.0 million as lower commodity prices more than offset higher volumes. Installations and services sales increased 12.2% to $64.2 million.
Heating oil and propane volume increased 3.6% to 107.5 million gallons, while other petroleum-product volume increased 72.1% to 25.8 million gallons, largely reflecting the Griffith acquisition. Heating oil and propane gross margin increased to $1.1006 per gallon from $0.9729. Management cautioned that the unusually strong margin level may not be sustainable.
Cash and cash equivalents were $28.1 million at December 31, 2014, compared with $49.0 million at September 30, 2014. Total assets were $733.5 million and partners’ capital was $283.3 million. Receivables increased to $181.4 million and inventories to $67.9 million, reflecting seasonal working-capital requirements.
Total debt was $124.6 million, consisting primarily of 8.875% Senior Notes due December 2017. No borrowings were outstanding under the revolving credit facility. Availability was $181.7 million, with $55.3 million of letters of credit outstanding and $28.7 million of hedge positions secured. The partnership reported compliance with applicable fixed-charge coverage requirements.
Material Changes Versus the Prior Comparable Period
- Sales declined despite higher total product volume because average selling prices fell with a 23.2% decrease in product cost per gallon.
- Product gross profit increased $21.0 million to $125.8 million, driven by higher heating-oil and propane margins, increased volume, and Griffith-related sales.
- Operating income and net income declined because the benefit from product margins was more than offset by an $8.3 million derivative fair-value charge, versus a $5.5 million credit in the prior-year period.
- Delivery and branch expenses rose 15.3%, depreciation and amortization rose 41.3%, and general and administrative expenses rose 12.0%, primarily due to acquisitions and operating costs.
- Adjusted EBITDA increased substantially because of the Griffith acquisition and higher product margins, although this non-GAAP measure excludes derivative fair-value volatility and does not represent operating cash flow.
- Operating cash use improved materially as lower product costs reduced receivable and inventory funding requirements.
- Net customer gains increased to 4,300, or 1.0% of the heating-oil and propane customer base, from 3,000, or 0.8%, in the prior-year quarter.
- The partnership repurchased 123,000 common units for $0.7 million, compared with 250,000 units for $1.3 million in the prior-year quarter.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management did not provide formal earnings guidance. For the remainder of fiscal 2015, maintenance capital expenditures were estimated at approximately $4.5 million, excluding leased-fleet requirements, with an additional $2.0 million planned for propane operations. At the then-current quarterly distribution rate of $0.0875 per common unit, remaining fiscal-year distributions were estimated at approximately $11.6 million to common unitholders, plus amounts payable to the general partner and management.
A quarterly distribution of $0.0875 per common unit was declared in January 2015, payable February 10, 2015. The partnership also expected a possible $1.7 million pension contribution during fiscal 2015 and intended to continue unit repurchases and pursue acquisitions within liquidity and covenant constraints.
Weather is a significant operating risk. The quarter’s base-business temperatures were 5.5% warmer than the prior-year quarter and 7.4% warmer than normal. Weather hedge contracts for fiscal 2015 through fiscal 2017 provide potential payments of $35,000 per heating-degree-day shortfall below the specified threshold, subject to a maximum annual payout of $12.5 million.
Commodity-price volatility affects margins, working capital, collateral requirements, and the fair value of derivatives. Because derivatives are not designated as accounting hedges, unrealized changes flow through earnings and can create substantial period-to-period volatility. At December 31, 2014, derivative liabilities exceeded derivative assets on a net presented basis by approximately $18.4 million.
The partnership completed the Griffith acquisition in March 2014, making year-over-year comparisons less comparable. It also entered into an agreement to service certain New York City heating-oil accounts, with estimated payments of approximately $1.0 million over three years based on account retention. In January 2015, it acquired a propane dealership’s customer lists and assets for approximately $1.1 million.
Management identified risks from customer attrition, natural-gas conversions, conservation, product supply and pricing, weather, counterparty credit, litigation, environmental and other regulation, labor relations, and acquisition execution. Management stated that no pending litigation was expected to have a material adverse effect, and reported effective disclosure controls as of December 31, 2014.
Important Facts for Investors to Verify
- Whether the Q1 heating-oil and propane margin of $1.1006 per gallon normalizes and how commodity prices affect future margins.
- The sustainability and quality of the 26.4% Adjusted EBITDA increase, particularly the contribution from Griffith and the reconciliation to operating cash flow.
- Seasonal liquidity needs, including receivables, inventory, letters of credit, hedge collateral, and actual availability under the revolving facility.
- The December 2017 maturity of the $125 million Senior Notes and the conditions required to extend the revolver’s termination date to January 2019.
- Weather conditions, natural-gas conversions, customer attrition, and the performance of price-protected customer contracts.
- The financial impact of the New York City account-servicing agreement, the January 2015 propane acquisition, and any subsequent acquisitions.
- The effect of the new revenue-recognition standard, ASU 2014-09, which management was evaluating and had not yet quantified.